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BY  J.  LAURENCE  LAUGH  LIN 

BANKING  PROGRESS 
MONET  AND  PRICES 
CREDIT  OF  THE  NATIONS 
LATTER-DAT  PROBLEMS 
INDUSTRIAL  AMERICA 
THE  PRINCIPLES  OF  MONET 

CHARLES  SCRIBNER'S  SONS 


MONEY  AND    PRICES 


MONEY  AND  PRICES 


BY 
J.  LAURENCE   LAUGHLIN,  Ph.D. 

Emeritus  Professor  of  Political  Economy  in 
the  University  of  Chicago 


NEW    YORK 
CHARLES   SCRIBNER'S   SONS 

1920 


Copyright,  1919,  by 
CHARLES  SCRIBNER'S  SONS 


Published  April,  igiy 


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PREFACE 

No  practical  economic  problem  has  been  brought 
more  prominently  to  the  front  than  that  of  prices  and 
how  they  are  regulated.  It  is  said  that  the  high  rate  of 
war  wages  cannot  come  down  until  prices  of  the  articles 
consumed  by  the  laborer  fall.  Indeed,  cost  of  living 
to  every  one  is  involved  in  the  price  question.  Why, 
then,  have  prices  gone  up?  To  what  force  must  we 
look  for  their  decline?  Some  writers  have  asserted 
that  prices  rise  and  fall  because  of  the  quantity  of 
money  in  circulation,  or  the  volume  of  credit  devices. 
On  the  other  hand,  there  was  no  such  expansion  of 
money  or  credit  as  would  account  for  the  rise  of  war 
prices  in  this  country.  Every  business  man,  more- 
over, knows  that  higher  wages  for  no  greater  labor 
effort  have  raised  prices.  It  is  a  very  timely  subject, 
indeed,  for  all  of  us. 

Instead  of  making  a  complex  and  theoretical  ex- 
position of  prices  and  their  causes,  it  occurred  to  the 
author  that,  after  a  simple  statement  of  the  principles 
involved,  the  forces  regulating  prices  might  be  clearly 
interpreted  for  the  general  reader  by  the  means  of 
practical  chapters  from  the  history  of  prices  since 
1850,  extending  to  the  end  of  the  European  War. 


iO 


vi  PREFACE 

Such  a  plan  enables  the  relation  of  the  production  of 
gold  to  the  price  level,  the  great  lack  of  uniformity 
in  the  prices  of  different  groups  of  articles — especially 
in  agricultural  products  as  contrasted  with  other 
groups — and  the  mooted  question  of  inflation  as  a 
cause  of  high  war  prices,  to  be  treated  in  this  volume. 
Thus  it  might  not  be  uninteresting  to  present  the 
workings  of  the  fundamental  principles  of  money — 
not  in  dry,  theoretical  essays,  but  in  the  form  of 
studies  upon  actual  happenings  and  emergencies  in  the 
experiences  of  recent  decades  down  to  the  present  day. 
A  unity  of  treatment  was  thus  obtained  which,  it  is 
hoped,  has  not  been  impaired  by  the  introduction  of 
several  topics  which  belonged  as  corollaries  to  the  main 
course  of  the  exposition.  These  also  were  episodes  of 
our  actual  experience. 

J.  Laurence  Laughlin. 

Jaffrey,  N.  H.,  1919. 


CONTENTS 

CHAPTER  I.    A  THEORY  OF  PRICES 

PAGE 

§    i.    Exchange  Value  of  Money i 

§    2.    Meaning  of  "Money" 2 

§    3.    Supply  of  Money 5 

§    4.    Forces  Affecting  Price 6 

§    5.    Price-Making  Precedes  Exchange 9 

§    6.    Purchasing  Power n 

§    7.    Demand  for  Money 15 

§    8.    Introduction  of  Credit 20 

§    9.    International  Movement  of  Specie     ....  23 

§  10.    The  Quantity  Theory 26 

CHAPTER  II.    GOLD  AND  PRICES  AFTER  1873 

§    1.    Fall  of  Prices  and  Scarcity  of  Gold       ...  31 

§    2.    Facts  as  to  Prices,  1873-1885 32 

§    3.    Credit  and  Money 38 

§    4.    Events  Leading  to  Panic  of  1873 41 

§    5.    Effect  of  Improvements  in  Lowering  Prices     .  43 

§    6.    Price  Movement  Not  Uniform 58 

§    7.    Theory  of  Appreciation  of  Gold 61 

§    8.    Economies  in  Use  of  Precious  Metals     ...  68 

§    9.    Fall  of  Profits  and  Wages 74 

§  10.    Conclusion 77 

vii 


viii  CONTENTS 

CHAPTER  III.     CHANGES  IN  PRICES  SINCE  1896 

PAGE 

§  i.    The  Problem  Analyzed 78 

§  2.    Resume  of  the  Causes  Affecting  Prices    ...  81 

§  3.    Facts  as  to  Prices  and  Production  of  Gold,  1850- 

1915 8S 

§  4.    Demand  for  Gold 89 

§  5.    Relation  of  Gold  to  Prices 94 

§  6.    Effect  of  Gold  on  Credit 97 

§  7.    No  Uniformity  in  the  Rise  of  Prices  .     .     .     .  ioi 

§  8.    Causes  Other  than  Gold  Affecting  Prices:  The 

Tariff,  Materials 106 

§  9.    Unionism  and  Higher  Wages 114 


CHAPTER  IV.    THE  INCREASED  COST  OF  LIVING 


§  1 

§  2 

§3 
§4 
§  S 
§6 


Farm  and  Food  Products    . 119 

Effect  of  Combinations  on  Prices 126 

Speculation 129 

Retail  Prices 131 

Extravagance  134 

Conclusion 135 


CHAPTER  V.    THE  EUROPEAN  WAR  AND  INFLATION 


§  1 
§  2 
§3 
§4 
§  5 


Meaning  of  Inflation 137 

Prices  and  the  Increase  of  Circulation    .     .     .  139 

Causes  Affecting  Goods 141 

Money  and  Prices  in  Europe 143 

Credit  and  Inflation 144 


CONTENTS  ix 


PACE 


§  6.    Relation  of  Reserves  to  Loans 146 

§  7.    The  War  Finance  Corporation 149 

§  8.    Inflation  Due  to  War  Loans 151 


§  1 
§  2 
§3 
§4 
§  5 
§6 


CHAPTER  VI.  AGRICULTURAL  UNREST 

Psychology  of  the  Greenback  and  Silver  Craze  152 

Agricultural  Revolution  Caused  by  Railways  .  158 

Price  of  Wheat  Fixed  by  World-Wide  Forces     .  162 

Agricultural  Readjustment 164 

A  Boom  and  Its  Reaction 167 

Free  Silver  a  Political  Deception 171 


CHAPTER  VII.    SOCIALISM  IN  THE  PRICE  QUESTION 

§  1.    Some  Common  Fallacies  About  Prices  ....  176 

§  2.    Prices  Related  to  the  Standard  and  Not  to  the 

Media  of  Exchange 180 

§  3.    Schemes  to  Change  Prices  Through  the  Quan- 
tity of  the  Circulation 182 

§  4.     Changing  Prices  by  Laws  Socialistic    ....  185 

§  5.    Free  Silver  Allied  to  Socialism 188 

§  6.    Socialism  in  Other  Issues 191 

CHAPTER    VIII.     A    MONETARY    SYSTEM    FOR    SANTO 

DOMINGO 

§  1.    Origin  of  the  Proposal 197 

§  2.    General  Economic  Conditions 198 

§  3.    Evils  of  a  Fluctuating  Standard 203 

§  4.    Effects  on  Producers  of  Exports 210 


x  CONTENTS 

PAGE 

§  5.    The  Depreciating  Standard  Reduced  Government 

Income 213 

§  6.    The  Silver  Standard  and  Prices 214 

§  7.    Sufferings  of  Laborers  and  Importers      .     .     .  219 

§  8.    Features  of  the  Remedial  Legislation      ...  222 


§  1 
§  2 
§3 
§4 
§  5 


CHAPTER  IX.    THE  REFUNDING  BILL  OF  1881 

The  Sensitive  Credit  Mechanism 233 

Ways  of  Reducing  National  Bank  Circulation  234 

Effect  of  Term  and  Rate  of  Interest  on  Bonds  242 

Destructive  Features  of  the  Refunding  Bill     .  245 

How  the  "Carlisle  Section"  Caused  the  Panic  .  252 

CHAPTER  X.     GOVERNMENT  VS.  BANK  ISSUES 


§  1.     Government  Convertible  Paper  Expensive     .     .  258 

§  2.    Confusion  Between  Monetary  and  Fiscal  Func- 
tions      263 

§  3.    The  Menace  of  Government  Issues       ....  265 

§  4.    Objections  to  Bank-Notes 267 

§  5.    Only  Bank-Notes  Have  Elasticity 273 

§  6.    Convertibility  by  Banks  More  Feasible   .     .     .  274 

CHAPTER  XL     THE  MONETARY  COMMISSION  OF  1897 

§  1.    Why  Our  Democracy  is  Slow  in  Reforms       .     .  280 

§  2.    Raison  d'Etre  of  the  Monetary  Commission  .     .  285 

§  3.    Vigorous  Expression  of  Business  Opinion       .     .  290 

§  4.    The  Position  of  Merchants  and  Bankers       .     .  293 


Appendix.    Law  of  Santo  Domingo,  1894 
Index      


299 
309 


CONTENTS  xi 

CHARTS 

PAGE  PLACE 

I.  Movement  of  Prices  in  Germany, 
France,?and  Great  Britain,  1850- 
1885 34    Chap.    II,  §  2 

II.    Movement    of    Group    Prices   at 

Hamburg,  1850-1885     ....      35    Chap.    II,  §  2 

III.  Gold  Prices  and  Gold  Production, 

1850-1915 86    Chap.  Ill,  §  3 

IV.  Changes    of    Prices    in    Certain 

Groups,  1890-1907 105    Chap.  Ill,  §  7 

V.    Wages  and  Prices,  1890-1907    .     .     113    Chap.  Ill,  §  2 
VI.    Movement  of  Prices,  1914-1918     .     137    Chap.    V,  §  1 


MONEY   AND    PRICES 

CHAPTER  I 
A  THEORY  OF  PRICES 

§  i.  Assuming  that  the  problem  of  the  theory  of 
prices  is  the  same  problem  as  that  of  the  value  of  money, 
we  are  at  once  required  to  explain  that  by  value  of 
money  we  mean  the  exchange  value  of  money.  With 
this  understanding  it  is  evident  that  the  level  of  prices 
is  only  a  statement  of  the  exchange  value  of  money  in 
terms  of  goods  in  general.  A  fall,  for  example,  in  the 
value  of  money  necessarily  carries  with  it  the  fa^t  of 
a  rise  in  the  prices  of  goods.  In  the  relation  of  a  par- 
ticular commodity  to  money,  price  is  the  quantity  of 
the  money  for  which  it  will  exchange.  If  we  are  speak- 
ing of  gold  prices,  the  price  of  a  single  commodity  is 
the  quantity  of  gold  for  which  it  will  exchange.  One 
cannot  think  of  price  except  as  a  ratio.1 

The  theory  of  prices,  therefore,  is  clearly  a  question 
of  exchange  value.     Consequently,  its  attainment  does 

1  It  is  impossible  for  me  to  understand  Professor  Kinley's  idea  of  value 
as  "the  quantity  of  marginal  utility  of  an  economic  good";  and  that  the 
unit  of  value  may  be  "the  amount  of  value  in  a  chosen  quantity  of  any 
article"  {Money,  p.  62).  The  qualities  of  an  article  inhere  in  it;  its  utility 
arises  from  a  relationship  between  these  qualities  and  the  needs  of  men; 
and  these  matters  affect  the  exchange  value  of  an  article.  How  can  we  take 
a  quantitative  measure  of  the  relation  between  the  qualities  of  a  commodity 
and  men's  regard  for  these  qualities?  This  gives  us  no  explanation  of  ex- 
change value. 

I 


2  MONEY  AND  PRICES 

not  appear  to  me  to  be  involved  in  the  solution  of  the 
fundamental  theories  of  value,  such  as  the  case  of 
marginal  utility  versus  cost  of  production.  Even  if 
value  be  regarded  as  an  unrelated  magnitude  of  utility, 
or  as  subjective  importance,  we  should  still  have  the 
problem  of  exchange  value.  Whatever  may  be  the 
various  theories  suggested  as  regulating  the  value  of 
gold,  or  of  a  given  commodity,  we  cannot  escape  the 
fact  that  exchange  value  between  gold  and  goods  is 
the  problem  of  the  value  of  money.  And  there  seems 
to  be  a  general  concurrence  in  this  simple  proposition.1 
I  am  certainly  in  general  agreement  with  most  econ- 
omists at  this  point. 

§  2.  When  we  mention  the  value  of  money,  how- 
ever, it  is  also  necessary  to  know  what  we  mean  by 
"money."  At  this  point  we  must,  as  investigators, 
be  willing  frankly  to  admit  that  there  is  no  agreement 
whatever  as  to  the  usage  of  the  term  "money."  Even 
the  same  writer  will  use  it  in  different  senses.  To 
some,  as  Nicholson,  for  instance,  money — so  far  as  it 
concerns  prices — is  gold  and  nothing  else;  to  others, 
like  Walker,  it  includes  also  government  paper  and 
bank-notes;  to  still  others  it  includes  all  the  forms  of 
credit  such  as  bills  of  exchange  and  checks. 

1  J.  S.  Mill:  Price  is  "the  quantity  of  money  for  which  it  will  exchange" 
(Book  III,  chap.  I,  §  i).  A.  T.  Hadley:  "A  price,  in  the  commercial  sense 
of  the  word,  may  be  defined  as  the  quantity  of  money  for  which  the  right 
to  an  article  or  service  is  exchanged"  (Economics,  p.  72).  Cf.  also  Seager, 
Political  Economy,  p.  51;  W.  A.  Scott,  Money  and  Banking,  p.  34,  and 
many  others. 


MEDIA  OF  EXCHANGE  3 

It  is  evident  enough  that  progress  can  be  made 
only  by  some  definite  conceptions  of  the  functions  of 
money.  In  my  opinion  the  distinction  between  the 
standard  commodity  in  which  prices  are  expressed, 
and  the  media  of  exchange  by  which  goods  are  in 
fact  conveniently  transferred,  is  essential  to  any 
insight  into  the  real  problem  of  prices.  This  distinc- 
tion is'  simple  enough,  but  it  is  far-reaching  in  its  in- 
fluence on  the  price  question.  For  instance,  we,  in 
the  United  States,  have  the  gold  standard;  and  by 
our  definition  the  price  of  any  commodity  is  the 
quantity  of  gold  for  which  it  will  exchange.  If  this 
be  so,  the  means  for  the  analysis  of  price  changes 
are  to  be  found,  very  evidently,  in  the  relative  values 
of  goods  and  gold.  Exchange  value  being  not  an  ab- 
solute but  a  relative  thing,  we  must,  in  a  study  of  the 
price  problem,  deal  with  all  the  forces  which  can  in- 
fluence the  ratio  between  goods  and  gold.  To  deal 
only  with  those  affecting  gold,  or  the  money  side  of 
the  ratio,  to  discuss  only  the  demand  for  gold  and  the 
supply  of  it,  would  be  inadequate  and  unscientific. 
To  assign  the  causes  of  changes  of  price  chiefly  to 
variations  in  the  quantity  of  money  is  not  only  one- 
sided, it  is  also  ambiguous;  because  "money"  is  only 
one  side  of  the  price  ratio,  and  to  those  taking  this 
point  of  view  " money"  may  not  mean  only  the  stand- 
ard commodity. 

To  this  point,  obviously,  everything  is  simple;   but 
here  an  honest  inquirer  rightly  may  suggest  that  there 


4  MONEY  AND  PRICES 

may  be  forces  working  on  the  value  of  gold,  and  thus 
on  prices,  caused  by  the  volume  of  other  forms  of  money 
than  gold,  such  as  government  paper,  bank-notes,  and 
forms  of  credit;  and  this  is  more  or  less  true.  In  the 
evolution  of  monetary  conveniences,  society  has  con- 
stantly aimed  at  finding  safe  media  of  exchange  to 
avoid  loss  from  the  use  of  the  valuable  standard,  which 
fully  accounts  for  the  creation  centuries  ago  of  such 
institutions  as  the  banks  of  Venice  and  Amsterdam; 
for  the  invention  of  the  bill  of  exchange;  for  bank- 
notes; and  more  lately,  for  checks  and  deposits  and 
clearing-houses.  In  the  main,  the  effect  on  the  value 
of  gold  of  an  increase  or  decrease  in  the  volume  of  the 
media  of  exchange  works  on  prices  only  in  so  far  as  it 
touches  the  demand  for  gold.  As  a  rule  the  evolution 
of  these  various  media  of  exchange  has  saved  gold 
from  being  used  as  a  medium,  and,  as  transactions 
have  increased,  has  relieved  it  pro  tanto  of  demand. 
The  influence  upon  prices  of  the  quantity  of  the  "cir- 
culation," when  that  word  means  media  of  exchange, 
therefore,  is  referable  to  the  class  of  forces  affecting  the 
demand  for  the  standard  commodity.  That  is,  devices 
which  save  the  use  of  gold  tend  to  keep  prices  up, 
because  they  protect  it  from  a  demand  which  other- 
wise would  have  worked  to  increase  the  value  of  gold 
and  thus  lowered  prices.  This  is  a  very  different  thing 
from  saying  that  an  increase  of  various  media  of  ex- 
change is  an  increase  of  purchasing  power,  and  causes 
a  rise  of  prices,  on  the  ground  that  forms  of  money 


SUPPLY  OF  STANDARD   COMMODITY         5 

are  necessarily  a  demand  for  goods.  In  my  judgment 
this  last  is  erroneous.  Demand  for  gold,  or  the  stand- 
ard, is  but  one  of  several  sets  of  forces  which  influ- 
ence the  level  of  prices,  or  the  value  of  "money."  Yet 
it  must  be  remembered,  while  sharply  distinguishing 
between  the  function  as  a  standard  and  that  as  a 
medium  of  exchange,  the  same  article  chosen  as  the 
standard,  like  gold,  may  also  be  used  as  a  medium  of 
exchange.  Although,  as  in  the  case  of  gold,  this  last 
use  may  not  be  extensive,  still  the  principles  of  price 
in  operation  are  acting  upon  that  part  of  the  money 
in  question  which  serves  as  a  standard  differently  from 
their  action  on  that  part  which  serves  as  a  medium  of 
exchange. 

§  3.  Obviously  the  supply  of  the  standard  com- 
modity must  be  one  force  affecting  its  value,  and 
thereby  the  level  of  prices.  Yet  the  operation  of  sup- 
ply on  the  value  of  an  imperishable  commodity,  like 
gold  or  silver,  is  not  the  same  in  different  epochs. 
To  change  its  value  the  new  supply  must  be  large  rela- 
tively to  the  total  stock;  but  as  production  goes  on 
the  total  stock  begins  to  assume  an  amount  quite  out 
of  proportion  to  the  new  supplies  from  year  to  year. 
Thus,  in  the  course  of  time,  changes  in  the  annual 
product — certainly  if  we  have  gold  in  mind — have  less 
and  less  practical  effect  upon  the  value  of  the  stand- 
ard and  hence  upon  prices. 

The  supply,  of  course,  cannot  be  considered  by  it- 


6  MONEY  AND  PRICES 

self;  it  must  be  taken  in  connection  with  demand. 
As  we  all  know,  an  increased  or  diminished  demand 
becomes  effective  on  the  value  provided  the  stock  is 
of  such  quantity  that  the  force  of  demand  is  apprecia- 
ble on  the  total  stock.  If,  then,  the  existing  stock  is 
very  great,  the  effect  of  ordinary  changes  in  demand, 
or  even  some  considerable  increase  in  demand,  could 
produce  little  modification  in  the  value  of  the  world's 
total  supply.  Hence,  variations  in  the  level  of  prices 
due  to  the  fluctuations  in  demand  for  a  standard,  like 
gold,  would  also  be  very  gradual  and  it  would  be  a  long 
time  before  the  results  on  general  prices  would  be 
evident. 

§  4.  A  frequent  error  in  past  discussions  of  prices 
has  arisen  from  a  careless  neglect  of  the  pivotal  and 
elementary  nature  of  price.  The  price  of  any  one 
article,  as  we  have  agreed,  is  the  quantity  of  the  stand- 
ard for  which  it  will  exchange.  We  are  studying  a 
case  of  exchange  value;  and  the  price  obviously  can 
be  modified  by  anything  which  raises  or  lowers  the 
exchange  ratio  of  goods  to  the  standard.  If  the  stand- 
ard were  supposed  to  be  constant,  any  one  knows  that 
changes  of  price  could  be  brought  about  by  changes 
in  the  expenses  of  production  of  goods.  Put  a  tax  on 
goods  and  it  is  expected  in  general  that  their  prices 
will  rise;  introduce  wonderful  new  inventions  which 
save  labor,  and  without  question  the  price  of  the  goods 
thus  affected  will  fall.    In  neither  case  is  it  possible 


HOW  PRICES  ARE  MODIFIED  7 

to  refer  the  change  in  prices  to  changes  in  the  demand 
and  supply  of  " money"  (however  it  may  be  defined). 
In  reality,  since  price  is  the  ratio  of  exchange  between 
goods  and  a  metallic  standard,  like  gold,  and  since  the 
enormous  production  of  gold  has  created  a  very  great 
total  stock,  any  sudden  or  extreme  fluctuations  in 
prices,  in  any  few  years,  could  not  be  assigned  to  causes 
operating  on  the  money  standard,  but  to  those  oper- 
ating on  goods  themselves.  Hence  the  active  causes 
working  on  the  level  of  prices  in  the  real  world  of 
to-day  are  not  to  be  sought  by  confining  ourselves 
wholly  to  the  one  side  of  "money"  in  the  exchange 
ratio.  The  general  level  of  prices  is  the  resultant  of 
the  two  sets  of  forces  acting  both  on  the  standard 
and  on  goods  in  general.  The  definite  outcome  can 
be  known  only  after  an  examination  of  the  relative 
strength  of  the  various  counteracting,  or  assisting, 
forces  on  both  sides  of  the  ratio.  For  instance,  since 
1880  there  has  been  an  unexampled  progress  of  the 
arts,  which  has  reduced  the  outlay  in  producing  nearly 
every  article  of  our  daily  consumption.  In  the  same 
time  there  has  been  an  unparalleled  gain  in  the  yield 
of  gold.  The  total  stock  of  gold  has  been  nearly 
trebled  since  1875.  There  has  been  some  increased 
demand  from  countries  adopting  a  gold  standard,  but 
in  no  proportion  to  the  increased  supply.  At  the  be- 
ginning of  this  century  only  about  one-half  of  the  total 
stock  of  gold  has  been  actually  used  in  the  currencies 
of  the  world.    Therefore,  gold  ought  to  have  fallen 


8  MONEY  AND  PRICES 

in  value  and  prices  have  risen.  Relatively  to  a  day's 
labor  it  has  fallen;  that  is,  a  day's  labor  exchanges 
for  more  gold  than  ever  before.  On  the  other  hand, 
the  marvellous  achievements  of  invention  and  dis- 
covery, have  in  general  lowered  the  cost  of  obtaining 
a  given  unit  of  goods  (i.  e.,  sl  yard,  a  ton,  etc.)  in 
such  a  phenomenal  way  that  in  the  race  for  cheap- 
ness of  production  goods  have  outstripped  gold. 
This  outcome  is  the  resultant  of  the  several  forces 
acting  on  the  general  price  level  since  1875.  As  com- 
pared with  prices  about  1879,  the  general  level  of 
prices  in  1896  was  about  20  per  cent,  lower.  And 
I  am  confident  this  fall  cannot  be  ascribed  to  any 
scarcity  of  gold,  nor  of  "money"  in  any  form.  The 
facts  may  be  seen  at  a  glance  in  Charts  I  and  III. 

This  analysis  of  price,  and  the  consequent  theory  of 
prices,  goes  with  the  insistence  upon  the  fundamental 
nature  of  exchange  value,  and  upon  the  definition  of 
price.  Clearly  enough,  it  ignores  some  preconcep- 
tions which  many  of  us  have  imbibed  from  all  our 
earlier  studies  in  economics.  Sometimes  I  have  been 
wrongly  classed  as  a  rigid  Ricardian.  Strangely  enough 
for  this  classification,  a  correct  statement  of  our  mone- 
tary theory  obliges  me  to  depart  from  some  of  the  ac- 
cepted propositions  of  Ricardo.  He  has  led  many 
followers  to  put  too  much  emphasis  upon  the  effect  of 
the  quantity  of  money  on  the  level  of  prices. 

At  this  point  let  me  insist  that  I  do  not  remove 
"the  quantity  of  money"  from  the  forces  which  have 


THE  PRICE-MAKING  PROCESS  9 

an  influence  on  prices.  Full  and  sufficient  emphasis 
has  been  given  the  theoretical  effect  of  an  increase  in 
the  supply  of  the  standard  commodity  upon  its  value, 
and  thus  upon  prices.  Likewise,  the  effect  of  changes 
in  the  volume  of  media  of  exchange  upon  the  value  of 
the  standard  has  been  considered.  But  I  am  quite 
aware  that  some  may  still  believe  that  the  quantity  of 
the  media  of  exchange  has  a  direct  effect  on  prices  in 
other  ways,  for  instance,  by  being  offered  for  goods  as 
purchasing  power;  that,  with  a  stationary  circulation 
and  increasing  transactions,  the  lack  of  media  of  ex- 
change may  cause  a  fall  of  prices.  It  is  exactly  on 
this  point  that  some  explanation  of  the  application  of 
my  theory  of  prices  may  be  permitted. 

§  5.  Please  remember  that  in  a  brief  outline  of  a 
vast  subject  like  a  theory  of  prices  it  is  not  possible  to 
give  to  each  proposition  its  full  discussion  and  its 
proper  limitations.  Yet  it  is  necessary  to  insist, 
first  of  all,  upon  the  idea  that  the  valuation  of  goods, 
or  the  determination  of  their  price  in  some  standard, 
is  as  a  rule  the  outcome  of  conditions  antecedent  to 
the  formal  act  of  exchange  in  the  market  for  any 
form  of  money.  The  offer  of  a  certain  amount  of 
some  media  of  exchange  for  goods  merely  records  the 
antecedent  price-making  process.  The  media  of  ex- 
change come  into  play  after  the  price-making  process, 
and  not  as  a  part  of  that  process.  In  the  main,  the 
media  of  exchange  are  a  consequence,  not  a  cause, 


io  MONEY  AND  PRICES 

of  the  influences  determining  prices.  All  the  elements 
touching  the  acquisition  (materials,  labor,  transporta- 
tion, etc.)  of  an  article;  the  intensity  and  nature  of 
the  demand  for  it  from  consumers;  the  influence  of 
monopoly  conditions — all  these  are  in  constant  opera- 
tion in  determining  the  quantity  of  gold  for  which  the 
article  will  be  bought  and  sold.  But  demand  alone 
does  not  determine  the  price  of  any  freely  reproducible 
article.  Anything  affecting  its  expense  of  production 
must  be  taken  into  account.  After  these  forces  have 
done  their  work,  and  a  price  adjusted  by  these  forces 
has  been  fixed  in  the  markets,  the  goods  thus  valued, 
or  expressed  for  convenience  in  terms  of  a  standard, 
are  actually  exchanged  (or  paid  for)  by  some  medium 
of  exchange,  which,  in  these  days,  is  seldom  the  stand- 
ard money  commodity.  The  service  rendered  by  the 
medium  of  exchange  is  purely  one  of  convenience. 
The  seller  receives  for  the  price,  previously  agreed 
upon,  some  means  of  payment  (notes,  checks,  drafts, 
etc.)  related  to  the  standard  indirectly  by  some  test  of 
solvency  not  material  to  the  price-making  process  here 
under  discussion.  In  most  cases,  such  as  selling  wheat, 
or  cattle,  or  wholesale  goods,  the  media  of  exchange 
arise  out  of,  and,  as  a  consequence  of,  securing  a 
discount  at  a  bank  based  on  the  actual  transaction  in 
goods.  In  these  matters,  a  medium  of  exchange  is 
provided  by  the  banks  in  exact  proportion  to  the  sum 
of  the  value  of  the  goods  bought  and  sold.  As  a  mat- 
ter of  course,  the  quantity  of  the  media  of  exchange 


MONEY  AND   DEMAND  n 

must  be  drawn  for  sums  equal  to  the  transactions,  as 
expressed  in  dollars,  or  in  terms  of  the  standard. 
What  should  be  kept  in  mind,  however,  is  that  in  this 
whole  process  the  " money,"  i.  e.,  the  media  of  exchange 
needed  to  perform  the  transactions,  is  not  a  factor  in 
fixing  the  price  per  unit  of  goods.  What  buyer  or 
seller  of  wheat  or  cattle  is  influenced  in  fixing  the  price 
of  his  goods  by  calculations  as  to  the  total  supply  of 
money  in  the  country,  as  compared  with  the  work  to 
be  done?  That  process  goes  on  only  in  the  minds  of 
the  theoretical  writers  on  money. 

§  6.  Yet  to  many  minds  the  amount  of  a  man's 
purchasing  power,  which  he  can  offer  for  goods,  and 
which  consequently  affects  the  prices  of  those  goods, 
is  the  quantity  of  " money"  which  he  can  offer.  In 
this  way  it  is  sometimes  assumed  that  the  quantity 
of  "money"  put  into  circulation  is  synonymous  with 
the  demand  for  goods  in  general;  if  the  quantity  of 
" money"  is  reduced  the  demand  for  goods  is  reduced, 
and  vice  versa.  Therefore,  it  is  argued,  the  quantity 
of  money  in  circulation  is  a  direct  factor  in  fixing  the 
level  of  prices. 

To  my  mind  this  is  a  superficial  way  of  looking  at 
the  price-making  process.  If  we  hark  back  to  simple, 
fundamental  forces,  we  ought  not  to  go  astray  on  this 
matter.  In  the  first  place,  because  all  goods  and 
property  are  conveniently  expressed  in  dollars,  or  in 
the  gold  standard,  we  are  apt  to  think  of  money,  in- 


12  MONEY  AND  PRICES 

stead  of  goods,  as  the  primary  factor  in  trading  opera- 
tions. In  the  essentials  of  production  and  consump- 
tion, goods  are  the  primary  thing,  while  money  is 
only  a  secondary  or  incidental  thing,  introduced  solely 
as  a  convenience  and  subsidiary  to  the  main  operations 
of  satisfying  economic  wants.  In  the  next  place,  a 
man's  purchasing  power,  in  any  sense  in  which  he  can 
have  a  vital  influence  on  the  prices  of  things  he  desires, 
is  measured  not  by  the  amount  of  money  he  has,  but 
by  a  certain  amount  of  his  wealth;  or,  to  put  it  more 
exactly,  by  that  part  of  his  wealth  which  consists  of 
cash  and  of  immediately  salable  goods.  Since  im- 
mediately salable  goods  are  always  a  basis  of  legit- 
imate discounts,  it  amounts  to  saying  that  a  man's 
purchasing  power  is  limited  by  the  amount  of  his 
cash,  plus  his  credit. 

When  we  mention  this  conception  of  a  theory  of 
"purchasing  power,"  which  to  some  persons  forms  the 
demand  for  goods  in  general,  we  are  at  once  intro- 
duced into  the  subject  of  demand  for  and  supply  of 
goods.  In  short,  what  is  demand  for  goods?  That 
ought  to  be  a  simple  question;  but  it  is  not,  if  demand 
for  goods  is  made  synonymous  with  the  volume  of 
those  instruments  variously  defined  as  "money."  In 
case  of  particular  demand  and  supply,  a  fluctuation  in 
demand  may  cause  a  change  in  the  market  price  of  the 
one  commodity  in  consideration.  That  is  one  of  the 
ways  by  which  readjustments  of  the  values  of  com- 


WHAT  CONSTITUTES  DEMAND  13 

modi  ties  relatively  to  each  other  may  take  place.1 
Or  an  increase  in  expenses  of  production,  or  the  op- 
erations of  monopoly,  might  change  the  price  irrespec- 
tive of  demand.  On  the  other  hand,  in  the  case  of  a 
general  demand  and  supply,  we  all  know  as  an  eco- 
nomic commonplace  that  they  are  only  different  ways 
of  looking  at  the  same  total  mass  of  goods :  an  increase 
in  the  general  supply  of  goods  is  obviously  an  increase 
in  the  general  demand  for  goods.  Such  operations 
do  not  act  to  change  the  level  of  prices,  or  the  relation 
of  units  of  these  goods  to  a  standard  commodity,  such 
as  gold.  Ranchman  A  may  go  on  increasing  the  num- 
ber of  cattle  in  his  herd,  and  farmer  B  may  go  on  in- 
creasing the  yield  of  wheat  on  his  lands,  but  the  mere 
increase  of  cattle,  or  of  wheat,  does  not  necessarily 
lower  the  price  of  cattle  or  wheat.  To  explain  a  par- 
ticular price  we  must  also  deal  with  the  actual  demand 
for  cattle,  or  wheat — arising  from  those  who  have 
immediately  salable  goods  or  cash — as  compared  with 
the  increasing  supply.  The  demand  for  cattle  from 
owners  of  wheat  may  grow  as  fast  as  the  supply; 
and  vice  versa.  Our  fine-spun  theories  are  often  held 
up  by  a  sharp  glance  at  well-known  facts.  Since  1880 
we  have  witnessed  a  prodigious  addition  to  the  stock 
of  salable  goods  in  our  markets;  the  total  productivity 

1  And  a  number  of  changes  of  this  kind  in  several  groups  of  goods,  un- 
der a  speculative  influence,  may  theoretically  lift  the  level  of  prices  and  so 
change  the  value  of  gold;  but  this  would  be  temporary  and  due  to  ab- 
normal conditions. 


14  MONEY  AND  PRICES 

of  our  capital  and  labor  has  been  marvellously  in- 
creased; and  consequently  each  unit,  in  the  large 
total  output  of  units  of  goods  has  been  sold  at  a  lower 
price  than  before.  These  are  gold  prices,  and  yet 
no  one  can  for  a  moment  ascribe  such  a  fall  to  a  scar- 
city of  gold. 

At  this  point,  however,  reference  may  be  made  to 
some  great  new  production  of  gold,  such  as  that  after 
1850,  and  it  may  be  argued  that  as  a  matter  of  fact 
this  increase  in  gold  caused  a  rise  of  prices.1  But  it 
cannot  be  assumed  without  careful  proof  that  this 
actual  change  of  prices  was  due  to  the  increased  quan- 
tity of  gold.  To  do  so  would  require  us  first  to  grant 
the  theory  which  is  itself  on  trial,  and  to  deny  the  effects 
of  all  other  forces,  some  of  which  were  obviously  at 
work,  to  raise  prices.  For  instance,  the  extraordinary 
rise  in  the  price  of  labor  at  the  time  of  the  gold  dis- 
coveries would  almost  alone  explain  the  higher  level 
of  prices  in  the  gold-producing  districts;  while  the 
sudden  demand  for  transportation  raised  freights  and 
prices  to  an  exceptional  extent. 

To  the  claim,  however,  that  an  increased  produc- 

1  In  1850  and  thereafter  the  new  supply  of  gold  was  large  relatively  to 
the  existing  stock,  and  the  value  of  the  standard  commodity  must  have 
fallen,  with  a  consequent  effect  of  a  tendency  to  higher  prices,  which  was 
doubtless  exaggerated  by  speculation  (cf.  Chart  III). 

But,  since  1896,  the  unexampled  increase  in  the  production  of  gold  has 
not  proportionally  influenced  prices,  owing  to  the  already  large  accumula- 
tions in  the  total  stock.  The  admitted  rise  of  prices  must  be  due  more  to 
conditions  affecting  the  production  of  goods,  such  as  monopolies,  trusts, 
higher  wages  for  the  same  or  less  effort,  increase  in  costs  of  obtaining  ma- 
terials, taxes,  and  the  like. 


NEW  GOLD  AND  HIGHER  PRICES  15 

tion  of  gold  adds  to  general  purchasing  power  and  so 
raises  the  level  of  prices,  let  me  suggest  that  the  bring- 
ing into  existence  of  new  wealth  of  any  kind — whether 
new  gold,  new  wheat,  or  new  cattle — adds  likewise  to 
man's  purchasing  power.  Hence,  according  to  this 
theory,  a  new  supply  of  wheat,  or  cattle,  ought  to 
raise  the  general  price  level,  because  of  increased 
"purchasing  power,"  just  as  much  as  a  similar  sum  of 
gold.  Keeping  in  mind  that  we  are  here  concerned 
only  with  the  idea  that  "purchasing  power"  is  the 
form  by  which  prices  in  general  are  affected,  we  may 
see  that  increase  of  wealth  in  any  form  ought  to  in- 
crease purchasing  power,  and  thus  raise  prices;  but 
we  all  know  it  does  not.  Hence  there  must  be  some- 
thing wrong  with  this  way  of  determining  prices.  In 
my  judgment  the  error  lies  in  not  seeing  that  pur- 
chasing power  is  synonymous  with  goods  and  not  with 
"money." 

§  7.  Probably,  when  we  were  discussing  the  phe- 
nomenal increase  in  the  production  of  goods,  it  may 
have  occurred  to  some  that  the  vital  thing  in  lowering 
prices  was  passed  over;  that  this  vast  addition  of  new 
goods  has  made  a  corresponding  increase  in  the  de- 
mand for  "money"  to  carry  on  the  new  volume  of 
transactions;  and  that  prices  must  have  consequently 
fallen  because  "money"  has  not  been  sufficiently  en- 
larged in  amount. 

Before  discussing  this  point,  let  there  be  a  word  as 


16  MONEY  AND  PRICES 

to  the  logic  employed.  If  it  be  shown  that  transac- 
tions have  increased — which  all  admit — and  also  that 
prices  have  fallen,  it  is  not  competent  to  assume  that 
prices  have  fallen  because  "money"  has  not  increased 
in  proportion  to  the  transactions.  This  method  of 
arguing  assumes  the  whole  point  at  issue — the  cause 
of  the  change  in  the  price  level.  In  order  to  prove 
that  the  amount-  of  money  in  circulation  regulates 
prices,  it  is  not  permissible  in  the  progress  of  the  argu- 
ment to  assume  the  thing  to  be  proved. 

To  pass  now  to  the  main  question — even  if  we  admit 
that  the  demand  for  goods  is  not  synonymous  with 
the  volume  of  the  circulation — there  is  a  strong  belief 
that  the  demand  for  money,  in  exchanging  goods,  is 
imperative,  sui  generis;  and  that  an  increase  of  trans- 
actions must  necessarily  increase  the  demand  for 
"money,"  enhance  the  value  of  "money,"  and  thus 
lower  prices.  It  is  exactly  in  this  connection  that,  in 
my  judgment,  the  inadequacy  of  the  old  reasoning 
about  prices  most  clearly  appears.  In  a  word,  this 
inadequacy  is  to  be  found  in  an  untenable  assumption 
about  the  conditions  under  which  the  issues  of  money 
are  made.  In  these  days  it  is  impossible  to  start  with 
the  old  assumption  that  the  quantity  of  the  circula- 
tion is  capable  of  monopoly.  And  yet  this  is  the  Ri- 
cardian  hypothesis.  If  there  were  limited  sorts  of 
media  of  exchange,  and  if  these  were  wholly  under 
control  as  regards  the  quantity  outstanding,  the  con- 
clusion which  follows  might  be  hypothetically  correct; 


AVAILABLE   MEDIA  OF  EXCHANGE         17 

but    it    would    be    quite    aside    from    the    facts    of 
to-day. 

It  is  true  that  the  demand  for  some  media  of  ex- 
change, by  which  the  inconveniences  of  barter  may  be 
obviated,  is  in  a  s.ense  imperative.  The  great  mass  of 
modern  transactions  could  not  possibly  be  carried  on 
without  the  use  of  some  form  of  a  medium  of  exchange. 
But  in  our  day  there  is  a  wide  choice  between  various 
media  of  exchange.  Instead  of  there  being  only  one 
kind,  over  which  there  is  a  monopoly  control  by  the 
state,  there  are  many  available  kinds.  In  the  United 
States,  for  instance,  should  gold  be  required  as  a  me- 
dium, there  is  free  coinage,  and  a  demand  for  its  use 
would  be  a  demand  upon  the  large  existing  stock  in 
the  world,  and  not  upon  the  sum  actually  in  use 
within  this  country;  in  a  real  sense  gold  is  an  elastic 
currency  which  can  be  freely  imported  or  exported. 
But,  for  the  transfer  of  goods  there  are  also  govern- 
ment notes,  national  bank  notes,  Federal  Reserve 
notes,  bills  of  exchange,  drafts,  and  the  deposit 
currency  of  banks.  If  there  is  an  imperative  demand 
for  a  medium  of  exchange,  and  if  it  is  found  that  one 
sort  of  medium  is  limited,  instead  of  a  persistent  de- 
mand that  will  raise  the  value  of  that  one  kind,  the 
need  can  be  satisfied  by  some  other.  No  exceptional 
pressure  will  be  brought  to  bear  on  the  value  of  one 
kind  until  the  capabilities  of  all  kinds  have  been  ex- 
hausted. Indeed,  the  final  outcome  is  that  in  the 
deposit  currency  we  have  a  mechanism   capable  of 


1 8  MONEY  AND  PRICES 

expanding  its  efficiency  exactly  in  proportion  to  the 
work  to  be  done.  It  is  this  medium  of  exchange 
which,  in  most  communities  having  wholesale  trans- 
actions, takes  up  all  possible  excess  of  demand  which 
conceivably  might  fall  on  the  other  media.  There- 
fore, instead  of  there  being  a  demand  for  a  medium  of 
exchange  which  produces  a  need  so  imperative  that  it 
can  give  thereby  a  special  value  to  a  form  of  money, 
we  must  believe  that  with  the  growth  of  legitimate 
transactions,  there  is  created  ipso  facto  a  medium  by 
the  banks  in  a  proportion  exactly  corresponding  to  the 
new  need.  This  is  no  new  saying,  but  only  an  applica- 
tion of  a  truth  long  ago  expressed  by  a  former  presi- 
dent of  the  American  Economic  Association,  as  follows : 

"If  the  United  States  Government  were  to  pay  off 
every  legal  tender  note,  and  if  every  bank-note  were 
to  be  withdrawn,  these  changes  would  produce  no  real 
contraction  of  the  currency.  With  specie  thus  brought 
into  common  use  for  smaller  and  every-day  transac- 
tions, we  should,  it  is  true,  have  a  currency  far  less 
convenient  for  its  minor  uses,  and  we  should  no  doubt 
see  the  use  of  the  deposit  and  check  system  thus  car- 
ried prematurely  into  classes  of  transactions  and  sec- 
tions of  country  where  the  note  now  meets  a  popular 
demand;  but,  as  regards  the  mass  of  exchanges  from 
which  the  business  condition  of  the  country  at  any 
given  time  takes  its  tone,  we  should  find  them  carried 
on  as  now,  by  a  creation  of  bank  credits  on  whatever 
scale  the  needs  of  the  time  might  require."  x 

1  C.  F.  Dunbar,  "Deposits  as  Currency,"  Quar.  Journ.  Econ.,  I,  July, 
1887,  pp.  409-413.     Also  Economic  Essays  (1904),  p.  179. 


DEMAND  AND   SUPPLY  19 

Nor  does  it  touch  the  pivotal  point  of  the  price  ques- 
tion to  discuss  the  effect  on  prices  of  changes  in  the 
rate  of  interest.  A  rise  in  the  rate  of  interest,  as  is 
known  to  all  economists,  is  a  rise  in  the  charge  for  the 
use  of  capital,  and  does  not  necessarily  involve  a 
corresponding  demand  for  standard  money  in  which 
prices  are  expressed.  But  the  essential  fallacy  in  try- 
ing to  connect  the  "value  of  money"  with  the  rate 
of  interest  consists  in  supposing  that  price,  or  the  ex- 
change value  between  goods  and  some  standard,  can 
be  determined  by  studying  only  the  forces  on  the 
money  side  of  that  exchange. 

It  seems  to  me  obsolete  to  talk  of  the  offer  of  goods 
as  the  true  demand  for  "  money,"  in  any  sense  that 
such  a  demand  regulates  its  value.  The  need  of  a 
medium  of  exchange  requires  satisfaction;  but  the 
human  race  has  long  ago  evolved  a  means  of  payment, 
through  various  devices,  which  meets  this  need  with 
very  little  demand  upon  the  valuable  standard  itself, 
and  consequently  without  creating  any  effects  to  speak 
of  on  the  value  of  gold,  and  thus  on  the  level  of  prices. 
In  applying  the  theory  of  demand  and  supply  to  the 
price  problem,  the  demand  for  a  medium  of  exchange 
is  not  at  all  synonymous  with  a  demand  for  the  stand- 
ard in  which  prices  are  expressed.  Nor  is  the  supply 
of  "money,"  which  has  any  direct  influence  on  general 
prices,  the  supply  of  the  media  of  exchange.  We  may 
have  vast  changes  in  the  supply  of  media  of  exchange 
without  causing  any  changes  in  the  price  level.     If 


20  MONEY  AND  PRICES 

changes  take  place  in  the  quantity  of  such  media,  as 
deposit  currency,  for  instance,  they  indicate  only  that 
operations  in  goods  giving  rise  to  these  forms  of 
credit,  which  served  instead  of  gold,  have  been  chang- 
ing. They  are  in  the  main  referable  to  changes  in 
the  condition  of  business,  to  a  rise  or  fall  of  the 
volume  of  ^transactions,  due  to  causes  quite  inde- 
pendent of  the  quantity  of  "money"  in  circulation. 
The  principle  of  demand  and  supply  as  applied  to 
the  price  question  still  holds  good.  On  the  one  side, 
there  is  an  increase  or  decrease  in  the  demand  for  the 
commodity  used  as  the  price  standard,  as  well  as  an 
increase  or  decrease  in  its  supply,  to  be  taken  into 
account.  But  this  is  only  half  the  solution.  On 
the  other  side  of  the  price  ratio,  there  is  the  in- 
crease or  decrease  in  the  expenses  of  production  of 
goods  in  particular  and  in  general  which  are  to  be 
compared  with  the  standard  of  prices.  These  points 
are  essential  elements  in  any  theory  of  prices. 

§  8.  In  regard  to  credit,  it  is  to  be  said  not  only 
that  it  has  been  very  much  misunderstood,  but  that 
it  has  been  given  very  little  real  study.  There  is 
to-day  no  commonly  accepted  definition  of  credit: 
the  element  of  futurity  in  a  credit  transaction  is  gen- 
erally admitted,  but  "confidence"  is  by  some  re- 
garded as  the  essential  element;  and  yet  "confidence" 
can  play  its  role  only  because  futurity  exists  in  the 
credit  operation. 


MEANING  OF  CREDIT  21 

Nor  is  there  any  received  opinion  as  to  the  real 
nature  and  functions  of  credit.  We  seem,  in  the  whole 
field  of  credit,  to  be  on  the  frontier  of  knowledge. 
In  any  true  sense,  the  economic  end  of  society  is  the 
possession  and  use  of  goods  which  satisfy  wants. 
Credit  has  been  devised  as  one  of  many  means  to  aid 
in  accomplishing  this  end.  In  its  fundamental  rela- 
tions it  has  to  do  with  goods  and  their  increase.  To 
some,  however,  it  is  related  only  to  money.  The  truth 
of  this  concept,  to  my  mind,  depends  upon  our  under- 
standing as  to  the  nature  of  money.  If  money  be 
only  a  means  to  an  end,  and  if  it  does  not  alter  the 
elemental  principles  of  value,  but  aids  and  cheapens 
the  exchange  of  goods,  then  it  is  easy  to  understand 
that  a  borrower  in  reality  obtains  the  use  of  goods, 
as  the  purpose  of  a  loan,  and  that  money  and  credit 
are  but  the  instruments  devised  by  society  for  effec- 
tually carrying  out  that  purpose.  Hence  the  credit 
operation,  as  regards  extension  or  contraction,  is  pri- 
marily based  on  transactions  in  goods;  its  relation  to 
money  is  a  secondary,  and  incidental,  connection. 
Credit  being  a  transfer  of  goods  involving  the  return 
of  an  equivalent  in  the  future,  forms  of  credit  appear 
only  as  a  consequence  of  transactions  in  goods.  More 
transactions,  not  more  money,  cause  an  increase  of 
forms  of  credit;  and,  by  an  interesting  process  of  evo- 
lution, forms  of  credit — especially  the  deposit  currency 
of  banks — act  as  a  medium  of  exchange,  obviating 
recourse  to  money.    The  belief,  however,  that  credit- 


22  MONEY  AND  PRICES 

depends  on  money,  and  not  on  goods,  is  wide-spread, 
and  much  discussion  is  probably  before  us  on  this 
point. 

The  relation  of  credit  to  the  theory  of  prices  is  not 
so  clear:  some  think  that  all  the  money,  plus  all  the 
credit  (whatever  that  may  be),  are  the  primary  ele- 
ments working  to  fix  the  level  of  prices;  but  any  one 
will  see  at  a  glance  that  the  forms  of  credit,  such  as 
bills,  drafts,  etc.,  arising,  for  instance,  from  the  move- 
ment of  the  wheat  crop,  have  no  effect  on  the  price  of 
that  crop — the  price  having  been  made  antecedent  to 
the  creation  of  the  forms  of  credit  which  came  into 
existence  only  because  of  the  actual  sales  of  wheat. 
Does  a  farmer  wait  until  he  sees  how  many  wheat 
bills  are  drawn  before  fixing  the  price  of  his  wheat? 
Evidently  not;  and  this  mistaken  belief  needs 
thorough  criticism. 

It  is  not  possible  here  to  introduce  in  detail  the  re- 
lation of  credit  to  the  price  level.  In  speaking  of  the 
theory  of  purchasing  power,  it  was  stated  that,  in  a 
true  sense,  a  man's  purchasing  power  consisted  of  all 
his  cash,  and  of  all  his  immediately  salable  goods; 
or,  of  all  his  cash  plus  all  his  credit.  The  general  pur- 
chasing power  of  a  community,  therefore,  directed 
against  all  goods,  is  composed  of  all  the  cash,  plus  all 
the  immediately  salable,  or  bankable  goods.  This, 
however,  is  only  a  statement  of  the  machinery  by  which 
all  goods — all  supply  and  all  demand — are  exchanged 
against  each  other.    In  truth,  normal  credit,  by  coin- 


CREDIT  AND  PRICES  23 

ing  salable  goods  into  present  means  of  payment, 
merely  sets  more  goods  into  circulatory  exchange 
against  each  other  than  would  be  possible  without 
the  use  of  credit.  In  the  end,  since  only  a  larger  vol- 
ume of  goods  are  offset  against  each  other,  we  have 
a  movement  of  a  larger  volume  of  goods  at  prices 
previously  determined  by  a  price-making  process — a 
process  usually  finished  before  the  moment  when  the 
goods  are  exchanged  for  some  form  of  money.  With 
abnormal  credit,  there  may  be  a  temporary  and  fic- 
titious rise  of  prices,  followed  inevitably  by  a  serious 
decline.1 

When  men  speak  of  "our  expansion  of  credit,"  they 
have  a  very  vague  and  general  idea  in  their  minds. 
The  definite  and  distinct  forces  at  work  are  covered 
with  darkness;  and,  when  a  revulsion  of  trade  comes, 
the  results  are  accepted  as  due  to  some  undefined  and 
mysterious  force  which  can  only  be  felt,  but  not  ex- 
plained. It  remains  the  duty  of  the  economic  thinker 
to  outline  with  scientific  exactness  the  forces  uniting 
in  the  upward  wave  of  overtrading,  and  to  state  with 
equal  definiteness  the  causes  of  the  receding  move- 
ment. Principles  must  be  sought  for  which  will  ex- 
plain the  differing  actualities  of  each  special  crisis. 

§  9.  The  settlement  of  the  theory  of  prices,  or  the 
principles  determining  the  value  of  money  (suitably  de- 

1  For  a  more  extended  discussion  of  credit  and  its  relation  to  prices,  cf. 
my  Principles  of  Money,  chap.  4,  and  especially  p.  112. 


24  MONEY  AND   PRICES 

fined)  has  an  importance  reaching  out  into  the  field 
of  the  international  movements  of  specie.  We  can- 
not properly  formulate  the  methods  by  which  the 
shifting  of  specie  and  goods  act  upon  each  other  in 
international  trade  without  having  previously  reached 
a  definite  conclusion  upon  the  theory  of  prices.  Thus 
the  examination  of  and  agreement  upon  the  theory  of 
prices  will  largely  determine  the  statements  made 
concerning  the  relation  between  the  shipments  of  specie 
and  the  level  of  prices  within  a  country. 

With  the  Ricardian  formula,  derived  from  the  ex- 
perience of  England  in  the  early  part  of  the  last  cen- 
tury, writers  have  attempted  to  solve  this  problem  by 
using  the  quantity  of  money  in  a  country  as  the  force 
regulating  its  general  level  of  prices:  if  gold  is  ex- 
ported, prices  must  fall;  if  gold  is  imported,  prices 
must  rise.  In  brief,  the  originating  cause  of  a  change 
in  the  general  level  of  prices,  so  far  as  international 
trade  is  concerned,  is  the  shipment  of  specie.  The 
movement  of  goods  is  a  consequence  of  the  change  of 
prices  brought  about  by  the  addition  or  subtraction 
of  specie.  That  is,  the  quantity  theory  has  been  re- 
lied upon  to  solve  this  highly  important  and  practical 
problem  of  money. 

The  original  statement  of  Ricardo  has,  of  course, 
been  added  to  and  emended;  but,  in  the  main,  it  was 
intended  to  show  that  any  one  country  obtains  a  part 
of  the  world's  circulation  of  specie  in  the  proportion 
that  its  trade  bears  to  that  of  other  countries.    This 


INTERNATIONAL  MOVEMENT  OF  SPECIE     25 

quota  of  gold,  for  instance,  is  retained  in  a  country 
by  influences  working  automatically  on  the  price  level 
through  changes  in  the  quantity  of  gold  within  that 
nation.  If  gold  is  withdrawn,  prices  fall,  exports  of 
goods  are  increased,  and  in  due  time  the  gold  begins 
to  return  until  the  country's  quota  of  gold  reaches  an 
equilibrium  adjusted  to  the  relative  demands  of  other 
countries.  The  movement  of  goods  forms  the  varia- 
ble in  the  process  which  aims  at  a  correction  of  the 
quota  of  gold,  whenever  the  equilibrium  has  been  dis- 
turbed. The  shipment  of  gold  is  the  initial  cause; 
the  movement  of  goods  is  a  consequence. 

In  support  of  this  view — the  orthodox  view — it  is 
held  that  gold  will  flow  wherever  its  exchange  value  is 
highest.  The  flow  of  gold  will  cause  redundancy  in 
the  receiving  nation,  and  thus,  because  it  is  cheap, 
will  raise  general  gold  prices  there;  or,  vice  versa,  will 
lower  prices  in  the  countries  from  which  gold  is  taken. 
The  possession  of  the  proper  amount  of  gold  seems  to 
be  of  the  main  importance,  while  commerce  is  regarded 
as  the  means  to  the  end. 

This  manner  of  treating  the  problem,  however,  re- 
verses the  true  order  of  events.  The  movement  of 
goods  is  the  fundamental  thing  behind  all  other  phe- 
nomena such  as  the  methods  of  payment;  the  move- 
ment of  money  is  a  secondary  operation,  dependent 
on  the  direction  and  extent  of  the  shipment  of  goods. 
Moreover,  to  say  that  gold,  like  other  goods,  flows 
where  its  exchange  value  is  highest,  is  a  truism;    the 


26  MONEY  AND  PRICES 

real  question  to  be  settled  is,  how  does  the  flow  of 
gold  take  its  effect  on  prices?  To  say  that  because  it 
is  abundant  it  raises  prices  is  to  assume  the  whole 
problem  at  issue.  How  does  a  cheapened  mass  of 
gold  adjust  itself  to  other  goods?  What  is  the  price- 
making  process  ?  Are  goods  priced  only  by  an  actual 
exchange  of  those  goods  against  the  increasing  flow  of 
gold?  On  this  point  the  adherents  of  the  orthodox 
teaching  of  Ricardo  have  offered  no  light. 

In  truth,  the  old-fashioned  theory  on  international 
price  changes  needs  restatement  in  vital  parts.  It 
will  be  found  that  forces  affecting  the  prices  of  goods, 
such  as  demand  and  supply  of  those  goods,  are  of 
primary  influence  in  affecting  prices,  quite  independent 
of  the  action  of  a  medium  of  exchange — which,  in 
fact,  chiefly  comes  into  existence  as  a  consequence  of 
the  exchange  of  goods.  The  movement  of  specie  is 
not  the  end  of  commerce,  but  specie  moves  as  a  con- 
sequence of  commerce.  The  monetary  changes  fol- 
low and  do  not  precede  the  operations  in  merchandise 
and  securities. 

§  10.  Only  after  the  honest  student  has  come  to  a 
satisfactory  conclusion  in  regard  to  the  nature  of  money 
and  credit  is  he  in  a  position  to  discuss  with  profit 
the  pivotal  problem  of  this  field — the  theory  of  prices. 
Perhaps  I  may  be  criticised  for  treating  here  the 
present  monetary  problems  from  too  theoretical  a 
point  of  view;    but  in  subsequent  chapters  it  is  the 


UNSETTLED  ISSUES  27 

purpose  to  present  the  question  of  prices  by  actual 
experience  of  concrete  operations.  Every  practical  re- 
former in  the  field  of  money  is  in  fact  using  some 
theory  of  prices,  true  or  false,  in  all  the  premises  laid 
down  in  his  propositions.  One  might  as  well  go  into 
practical  engineering  without  a  knowledge  of  thermo- 
dynamics as  to  discuss  practical  monetary  schemes 
without  first  settling  basic  monetary  principles.  But, 
unfortunately,  the  thinking,  even  among  so-called 
economists,  is  to-day  unsettled  on  so  pivotal  a  ques- 
tion as  the  theory  of  prices.  Practical  monetary  legis- 
lation, in  more  than  one  country,  would  be  radi- 
cally modified,  accordingly  as  the  so-called  "quantity 
theory"  of  money  is  accepted  or  not.  In  my  humble 
opinion,  that  theory  is  indefensible  and  erroneous; 
and  yet  our  great  politicians  in  the  United  States,  in 
their  fencing  on  the  monetary  problem,  have  decided 
that  the  question  of  the  gold  standard  has  been  defini- 
tively disposed  of,  because  of  the  large  recent  produc- 
tion of  gold.  The  partisans  of  gold  have  thus  ac- 
cepted the  principle  on  which  the  demands  for  an 
extension  of  the  circulation  of  silver  and  greenbacks 
have  been  based  in  the  past;  and  the  position  is  abso- 
lutely untenable. 

The  issues  thus  arising  are  unmistakable;  and  they 
must  be  thrashed  out  to  a  conclusion  before  any  prac- 
tical applications  can  be  attempted.  These  issues 
may  be  briefly  stated  in  the  following  heads: 

1.  Is  the  price  of  goods  the  quantity  of  some  stand- 


28  MONEY  AND  PRICES 

ard  commodity  for  which  they  will  exchange,  or  is  it 
the  relation  between  goods  and  a  variety  of  several 
media  of  exchange? 

2.  If  true  money  is  a  commodity,  like  gold,  then 
what  determines  the  exchange  value  between  goods 
and  that  commodity?  Is  the  problem  in  any  way 
different  from  that  of  obtaining  the  exchange  value 
of  any  two  commodities? 

3.  What  is  the  actual  process  of  evaluation  between 
goods  and  gold  ? 

4.  If  demand  and  supply  regulate  the  value  of  money 
(cost  of  production  apart),  what  is  the  exact  meaning 
of  demand  for  money,  and  of  supply  of  money  ? 

5.  Is  the  demand  for  a  money  metal  only  the  mon- 
etary demand?  Is  the  demand  for  a  commodity  as 
money  something  sui  generis? 

6.  In  the  theory  of  prices,  what  is  meant  by 
"money"?  Is  it  only  gold,  or  gold  together  with 
everything,  such  as  deposit  currency,  which  acts  as  a 
medium  of  exchange?  In  short,  what  constitutes  the 
supply  of  money? 

7.  If  prices  are  influenced  by  " purchasing  power," 
is  that  synonymous  with  the  sum  of  the  existing  media 
of  exchange,  multiplied  by  their  rapidity  of  circula- 
tion? Or,  is  purchasing  power  in  its  ultimate  anal- 
ysis synonymous  with  the  offer  of  salable  goods  ? 

8.  Have  the  expenses  of  production,  or  progress  in 
the  arts,  no  influence  on  the  general  level  of  prices? 
Does  supply  as  well  as  demand  affect  prices? 


UNSETTLED   ISSUES  29 

9.  What  is  the  effect  of  credit  on  general  prices? 

10.  How  do  fluctuations  in  bank  reserves  actually 
affect  general  prices  ?  Does  the  rate  of  interest,  being 
paid  for  capital  and  not  for  money,  have  an  effect  on 
prices  through  its  effect  on  loans? 

n.  By  what  economic  process  would  a  great  new 
supply  of  gold  influence  general  prices  ?  Only  by  being 
directly  offered  for  goods  as  a  medium  of  exchange  ? 

12.  Does  the  Ricardian  reasoning  in  favor  of  the 
quantity  theory  of  prices  hold  in  monetary  systems 
where  free  coinage  of  the  standard  money  exists,  and 
where  other  devices  are  used  as  media  of  exchange? 
If  mints  are  open,  how  can  the  coin  differ  in  value  from 
the  bullion  of  which  it  is  made? 

It  is  safe  to  say  that  the  thorough  discussion  of  these 
points,  and  a  satisfactory  disposal  of  them,  is  neces- 
sary to  the  solution  of  the  central  monetary  problem, 
not  only  of  the  past,  but  of  the  present  time.  It  is 
one  which  cannot  be  blinked.  It  arises  at  every  step 
in  popular  monetary  discussions,  and  the  econo- 
mists have  not  given  it  due  attention.  On  the  set- 
tlement of  the  theory  of  prices,  of  the  value  of  money, 
a  host  of  minor  questions,  which  have  caused  endless 
and  fruitless  differences  of  opinion,  will  disappear. 
The  solution  of  this  matter  of  theory  is  of  the  greatest 
practical  import;  it  is  as  important  to  practical  mon- 
etary action  as  is  a  theory  of  heat  to  mechanics. 
Therefore  let  us  not  be  deterred  from  a  struggle  with 
a  fundamental  matter  of  theory  by  any  slighting  and 


30  MONEY  AND  PRICES 

cheap  sarcasm  about  the  futility  of  theoretical  and 
abstract  discussions.  As  well  scoff  at  the  mathe- 
matics which  lies  behind  physics  and  astronomy  as 
theoretical. 

Nor  will  it  be  wise  to  minimize  the  differences  be- 
tween the  old  and  new  points  of  view  in  the  theory  of 
prices.  It  may  be  said  that  the  quantity  of  money 
would  have  an  influence  on  general  prices  in  any 
theory.  True;  but  that  does  not  touch  the  crucial 
point  at  issue.  The  quantity  theorists  make  the  proc- 
ess of  evaluation  between  goods  and  "money"  depen- 
dent on  the  actual  offer  of  the  medium  of  exchange  and 
goods  for  each  other;  an  increase  of  transactions  in 
goods  is  an  increased  demand  for  money,  resulting, 
unless  the  quantity  of  money  is  increased,  in  falling 
prices.  It  is  needless  to  say  that  the  facts  do  not 
warrant  these  statements. 


CHAPTER  II 
GOLD   AND   PRICES   AFTER    1873 » 

§  i.  The  principles  regulating  prices  may  now  be 
tested  by  a  study  of  the  movement  of  prices  since 
1850.  There  seem  to  be  three  well-defined  periods 
in  the  movement  of  prices  since  that  date:  one,  an 
upward  tendency  to  about  1873;  another  of  declining 
prices  from  1873  to  1896;  and  the  last,  of  rising  prices 
since  1896.  In  this  chapter  we  are  concerned  with  the 
period  of  falling  prices  since  1873.  Having  presented 
in  the  preceding  chapter  the  forces  governing  prices, 
we  are  the  better  prepared  to  study  these  forces  at 
work  since  1850. 

Much  of  the  difference  of  opinion  as  to  the  signifi- 
cance of  recent  movements  of  prices  is  due  to  the  fact 
that  the  value  of  gold  is  a  ratio  which  varies  with  a 
variation  in  either  of  its  terms.  Whether  commodities 
fall  in  relation  to  gold  or  gold  rises  in  relation  to  com- 
modities, in  either  case  the  value  of  gold  has  risen. 
The  same  phenomena,  therefore,  may  be  due  to  radi- 
cally different  causes.  So  that,  admitting  the  fall  of 
prices,  it  is  said,  on  the  one  hand,  that  the  rise  in  the 
value  of  gold  is  due  to  some  cause  affecting  gold  it- 

1  From  the  Quarterly  Journal  of  Economics,  April,  1887.  This  discussion 
of  prices,  written  long  before  the  present  emphasis  on  the  quantity  theory, 
may  be  of  interest  for  reasons  relating  to  questions  of  method. 

3i 


32  MONEY  AND  PRICES 

self,  such  as  scarcity;  or,  on  the  other  hand,  it  is 
claimed  that  the  fall  in  prices  is  due  to  causes  con- 
nected solely  with  commodities,  and  not  with  gold. 

The  believers  in  the  scarcity  value  of  gold  in  this 
period  substantiate  their  position  by  reference  to  the 
falling  off  in  the  annual  production  of  gold;  the  un- 
usual demands  for  gold  since  1873  by  Germany,  Italy, 
and  the  United  States;  stringencies  in  the  money 
market;  the  increased  use  of  gold  in  the  arts;  the 
claim  that  the  fall  of  prices  is  general;  the  excep- 
tional character  of  the  depression  of  trade  since  1873; 
the  general  existence  of  low  wages,  profits,  and  rents; 
and  the  absence  of  any  progress  since  1873  m  the 
means  of  economizing  gold  and  silver.  These  opinions 
have  been  prominently  associated  with  Mr.  Robert 
Giffen,1  the  statistician  of  the  English  Board  of  Trade, 
and  Mr.  Goschen,2  then  chancellor  of  the  exchequer; 
while  the  evident  connection  of  the  main  proposition 
with  bimetallism  gave  it  a  semipolitical  character, 
and  many  supporters  in  both  Europe  and  America. 

§  2.  Inasmuch  as  the  rise  in  the  value  of  gold  since 
1873  is  in  proportion  to  the  fall  of  prices,  it  is  a  matter 
of  some  importance  to  look  critically  at  the  facts  in 
regard  to  prices.  With  this  object  in  view,  the  more 
important  tables  of  prices  since  1850  have  been  col- 
lected with  explanations  as  to  the  methods  of  compu- 

1  Journal  of  the  Statistical  Society  (London),  March,  1879. 

2  Journal  of  the  Institute  of  Bankers,  April  18,  1883. 


TABLES  OF  PRICES  33 

tation,  sources,  and  reliability.  It  is  hoped  that  a 
comparison  of  the  diverse  methods  and  results  of  these 
tables  will  serve  a  useful  purpose.1 

Hitherto,  the  figures  of  the  London  Economist  for 
twenty-two  articles  have  been  almost  universally  used 
as  evidence  in  regard  to  the  movement  of  prices;  but 
it  is  time  that  the  worship  of  this  fetich  should  cease. 
Of  late,  much  more  trustworthy  tables  have  been 
published. 

In  Chart  I  a  comparison  is  presented  of  the  prices 
in  Great  Britain,  Germany,  and  France.  The  un- 
trustworthiness  of  the  Economist  table  as  a  basis  for 
inferences  in  regard  to  causes  affecting  the  whole 
world  will  be  seen  at  a  glance  in  the  years  1862-67. 
The  table  of  Mr.  Sauerbeck,  however,  which  gives  the 
prices  of  thirty-eight  articles,  but  all  of  raw  produce, 
furnishes  a  somewhat  better  view  of  the  movement  of 
English  prices  to  the  present  day.  The  French  prices2 
show  a  less  rise  to  1873  and  a  less  fall  since  1873 
than  the  English  figures,  which  accords  with  what  we 
know  as  to  the  exemption  of  France  from  the  violence 
of  the  crisis  of  1873.  The  table  of  American  prices 
published  by  Burchard  cannot  be  depended  upon,  and 
is  not  used.  The  Hamburg  prices,  published  by  Dr. 
Soetbeer,  in  the  second  edition  of  his  Materialien 
(1886),  furnish  the  most  satisfactory,  accurate,  and 

1  See  my  Principles  of  Money,  pp.  171-224. 

2  The  number  100  in  this  table  corresponds  on  the  chart  to  123.6  of  Soet- 
beer's  table,  which  is  the  average  of  the  latter's  numbers  for  1865-69  (the 
years  used  as  a  basis  in  the  French  prices). 


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36  MONEY  AND  PRICES 

complete  collection  of  prices  then  made.  It  will  be 
seen  that,  while  Sauerbeck's  English  figures1  show  a 
greater  fall  since  1873  than  the  Hamburg  prices,  they 
do  not  fall  so  low  in  1885  as  the  Economist  prices. 
The  very  important  fact  to  be  observed,  however, 
from  the  Hamburg  table  is  that  prices  in  1885  were 
still  10  per  cent,  higher  than  they  were  before  the 
discoveries  of  gold  (1847-50);  and  it  is  significant 
that  prices  seem  to  have  fallen  less  as  we  go  to  tables 
which  include  a  greater  number  of  articles.  There  is 
thus  a  difference  of  about  30  per  cent,  in  the  results 
of  the  Hamburg  and  Economist  tables,  much  to  the 
discredit  of  the  latter;  in  fact,  the  Economist  table  is 
not  of  a  kind  to  be  compared  with  the  other. 

The  separation  of  the  movements  of  prices  in  special 
groups  of  commodities  in  the  Hamburg  tables,  as  pre- 
sented in  Chart  II,  shows  a  striking  divergence  in  the 
prices  of  agricultural,  animal,  mineral,  and  manu- 
factured products.  The  eye  is  at  once  struck  with 
the  great  rise  in  the  prices  of  animal  and  agricul- 
tural products  since  1850;  while  there  has  been  the 
expected  fall  in  the  case  of  manufactured  goods,  ac- 
companied by  a  surprising  fall  in  the  prices  of  mineral 
products. 

Among  other  illustrations2  of  economic  principles  to 
be  seen  in  these  charts,  there  is  one  which  Englishmen 

'The  standard  ioo  in  Sauerbeck's  table  represents  the  average  of  the 
years  1866-77,  which  corresponds  on  the  chart  to  128.7  oi  Soetbeer's  table. 

2  A  verification  is  given  of  the  principles  laid  down  by  Mr.  Cairnes,  Lead- 
ing Principles,  pp.  11 7-146,  on  derivative  laws  of  value. 


FALL  OF  ENGLISH  PRICES  37 

may  well  consider.  It  seems  possible  that  English 
prices  have  fallen  since  1873  more  than  prices  in  other 
countries.  If  so,  may  this  not  be  attributed  to  a  re- 
adjustment of  the  equation  of  International  Demand, 
due  to  a  lessened  demand  in  other  countries  for  Eng- 
land's products  compared  with  England's  demand  for 
the  products  of  other  countries?  Many  complaints 
have  been  heard  in  England  of  the  increasing  competi- 
tion of  Germany,  France,  and  the  United  States  in 
foreign  markets;  for  only  since  the  war  of  1870  have 
Germany  and  France  given  full  play  to  their  modern 
industrial  spirit.1  In  fact,  evidences  are  multiplying 
to  the  effect  that  the  demand  for  English  goods  has 
not  grown  in  a  sufficiently  gratifying  manner.  How- 
ever this  may  be,  it  is  much  more  likely  that  English 
goods,  being  largely  manufactured  products,  have 
been  affected  more  than  other  commodities  by  the  force 
of  improvements  and  inventions  which  have  lowered 
prices.  (See  Chart  II.)  If  these  explanations  be 
given  full  weight,  it  may  suggest  that  other  causes 
than  the  scarcity  of  gold  are  at  work  to  bring  about  a 
fall  of  English  prices.  Too  often,  the  reasoning  on  this 
subject  takes  for  granted  that  what  is  true  of  Great 
Britain  is  true  of  all  the  rest  of  the  world.  It  will  not 
by  any  means  be  admitted  that  a  lower  range  of 
prices,  when  once  reached,  has  prevented  prosperity2 
in  other  countries. 

1  Cf.  Fowler,  Appreciation  of  Gold,  p.  34. 

2  The  clearings  in  the  United  States  for  October  1,  1886,  were  one-fourth 
larger  than  for  October  i,  1885,  at  the  lower  range  of  prices. 


38  MONEY  AND  PRICES 

§  3.  Granting  a  fall  in  prices  during  about  fifteen 
years  since  1873  of  20  per  cent.,  yet  it  will  not  be 
possible  to  reason  directly  from  a  fall  of  prices  to  a 
scarcity  of  gold.  But  this  is  the  import  of  Laveleye's 
argument1  in  answering  Mulhall— who  had  gone  to 
quite  as  great  an  extreme  in  the  opposite  direction, 
and  had  denied2  any  connection  whatever  between 
prices  and  the  quantity  of  the  precious  metals — for 
Laveleye  even  classes  Mill  among  the  believers  in 
what  the  Germans  call  the  Quantitats-Theorie,  by  quot- 
ing his  words:3  "The  value  of  money  depends,  ceteris 
paribus,  on  its  quantity,  together  with  its  rapidity  of 
circulation.  ...  An  increase  of  the  quantity  of  money 
raises  prices,  and  a  diminution  lowers  them.  This 
is  the  most  elementary  proposition  in  the  theory  of 
currency,  and  without  it  we  should  have  no  key  to 
any  of  the  others."  In  his  final  statement,  however, 
Mill  plainly  says  (book  III,  chap.  XI,  §  3) :  "In  a  state 
of  commerce  in  which  much  credit  is  habitually  given, 
general  prices  at  any  moment  depend  much  more 
upon  the  state  of  credit  than  upon  the  quantity  of 
money. "  The  devices  for  economizing  money  which 
the  progress  of  society  has  developed  render  it  impos- 

1  Contemporary  Review,  May,  1886,  p.  632. 

2  History  of  Prices  since  the  Year  1850,  pp.  138,  139;  and  Contemporary 
Review,  August,  1885. 

3  Laveleye  str-angely  omits  the  succeeding  sentence:  "In  any  state  of 
things,  however,  except  the  simple  and  primitive  one  which  we  have  sup- 
posed, the  proposition  is  only  true,  other  things  being  the  same;  and  what 
those  other  things  are  which  must  be  the  same  we  are  not  yet  ready  to  pro- 
nounce" (book  III,  chap.  VIII,  §  4).  In  his  final  conclusion,  quoted  above 
by  me,  he  pronounces  what  they  are. 


CREDIT  AS  PURCHASING  POWER  39 

sible  to  say  that  prices  depend  directly  upon  the  quan- 
tity of  money.1 

Credit  in  its  full  development  is  quite  modern,  and 
its  relation  to  prices  is  not  always  carefully  defined. 
Mill,2  for  example,  prefaced  his  discussion  of  the  effect 
of  credit  on  prices  by  the  remark:  "It  is  not,  how- 
ever, with  ultimate  or  average,  but  with  immediate 
and  temporary,  prices  that  we  are  now  concerned." 
Now  there  is  no  conceivable  moment  but  that  of  a 
total  stoppage  of  trade  when  credit  is  not  in  active 
operation;  and  as  credit  is  purchasing  power  of  a 
highly  efficient  kind,  often  preferable  to  actual  coin, 
it  must  be  regarded  as  affecting  prices  not  temporarily, 
but  always,  with  greater  or  less  force.  At  some  periods 
it  may  be  more  actively  used  than  at  others.3    In 

1  Frewen,  Nineteenth  Century,  October,  1885,  p.  595,  carries  the  error  still 
further  by  claiming  that  prices  change  with  the  production  of  gold.  One 
cannot  assign  much  weight  to  Mr.  Frewen,  when  he  declares  that  capital  is 
spent  rather  than  accumulated  in  the  United  States,  because  of  the  heavy 
taxation  (p.  601) !  Dr.  Soetbeer,  Malerialien,  p.  81,  reminds  us  that  both 
Huskisson  and  Jacob  attributed  the  depression  which  prevailed  in  Europe 
after  1815  to  a  scarcity  of  the  precious  metals.  He  also  mentions  an  in- 
teresting book  by  J.  Helfferich,  published  in  1843,  which  combated  the 
Quantitats-Theorie,  and  explained  that  credit  can  separate  the  function  of 
a  medium  of  exchange  from  that  of  a  measure  of  value,  and  can  serve  as  the 
former  without  affecting  the  latter.  Most  German  bimetallists  (excepting 
Dr.  Arendt)  agree  with  Messrs.  Giffen  and  Goschen  in  attributing  the  fall 
in  prices  and  the  depression  of  trade  to  the  scarcity  of  gold.  But,  on  the 
other  hand,  Bourne,  Journal  of  Statistical  Society,  June,  1879,  P-  4*7.  who 
denies  the  scarcity  of  gold,  claims,  with  Mulhall,  that  the  quantity  of  gold 
had  no  relation  to  prices. 

2  Book  III,  chap.  XII,  §  1. 

'  Between  1833  and  1839  prices  rose  22^  per  cent.,  and  between  1839  and 
1844  fell  44  per  cent.;  and  "this  great  oscillation,"  Jevon«  asserted,  "was 
entirely  due  to  the  general  expansion  of  trade  and  credit,  and  to  its  sub- 
sequent collapse."  Contemporary  Review,  May,  1881,  p.  752.  Again,  in 
1857,  at  a  time  when  the  mines  were  yielding  unprecedented  auantities  of 
gold,  a  collapse  of  credit  produced  a  fall  in  prices  of  fully  15  per  cent. 


40  MONEY  AND  PRICES 

truth,  looking  only  at  the  money  side  of  the  price 
ratio,  the  general  level  of  prices  for  considerable  periods 
(sufficiently  long  to  permit  the  effect  of  changes  in 
the  business  habits  of  the  community,  or  changes  in 
the  existing  stock  of  gold,  to  be  felt)  must,  from  Mill's 
point  of  view,  depend  upon  a  combination  of  the 
quantity  of  money  with  the  various  forms  of  credit. 
The  two  are  inextricably  bound  together.  So,  there- 
fore, the  level  of  prices  (so  far  as  it  is  affected  by  the 
offer  of  a  medium  of  exchange)  depends  on  the  expan- 
sion or  contraction  of  two  factors,  quantity  of  money 
and  credit,  each  of  which  may  change  to  a  considera- 
ble extent  independently  of  each  other.  Both  may 
increase  or  diminish  together,  or  the  gain  of  one  may 
offset  the  loss  of  the  other.  A  great  collapse  of  credit, 
for  example,  without  any  change  whatever  in  the 
quantity  of  the  precious  metals,  might  lower  the  gen- 
eral level  of  prices;  and,  if  this  demoralization  of  con- 
fidence was  sufficient  to  alter  existing  conditions  of 
mind  in  the  commercial  classes,  it  would  produce  an 
effect  over  a  considerable  period  of  time.  On  the 
other  hand,  a  period  within  which  there  occurred  not 
only  an  enormous  increase  in  the  quantity  of  the 
metals  used  for  money,  but  also  an  unusual  expansion 
of  credit,  other  things  being  equal,  might  show  an 
advance  of  prices  quite  out  of  the  natural  order  of 
things.  Such  a  period  was  that  from  1850  to  1873,  if 
viewed  from  the  theory  that  prices  are  affected  solely 
from  the  side  of  money  in  the  price  ratio. 


CONDITIONS  BEFORE  1873  41 

§  4.    The  series  of  events  which  led  to  the  expan- 
sion of  trade  and  the  collapse  in  1873  were  unprece- 
dented in  their  magnitude.    The  greatest  production 
from  the  mines  which  the  world  had  then  seen  was 
pouring  gold  into  the  channels  of  trade.    In  spite  of 
the  expansion  of  commerce  and  the  absorption  of  gold 
by  France,  the  new  gold  may  have  affected  prices. 
But  this  set  in  motion  other  forces  which  had  an  effect 
on  prices.    The  gold  discoveries  themselves  created  a 
spirit  of  adventure,  and  stimulated  high  hopes  of 'gain 
in  unusual  ways.    Then,  too,  a  period  of  rising  prices 
breeds  speculation.    The  figures  of  home  and  foreign 
trade  were  swelled  by  the  higher  range  of  prices,*  and 
added  to  the  buoyant  feeling  under  the  inspiration  of 
which   new   enterprises  were  eagerly   entered   upon. 
The  Crimean  War  and  the  extraordinary  rise  of  agri- 
cultural products  (see  Chart  II)  aided  the  movement, 
which  received  but  a  partial  check  in  the  panic  of  1857. 
The  war  in  Italy  of  1859  was  followed  by  the  Civil 
War  in  the  United  States  in  1861.    The  latter  pro- 
duced a  great  rise  in  the  prices  of  cotton,  tobacco,  and 
breads  tuffs1  in  Europe;  and  the  issue  of  inconvertible 
paper  drove  gold  out  of  our  country.    Then  Italy2  also 
gave  up  her  specie  after  1865.    The  war  between  Prus- 
sia and  Austria  added  to  the  abnormal  extension  of 
trade,  which  in  1866  again  received  only  a  partial 

1  This  is  seen  in  the  Economist  figures,  in  Chart  I. 

2  The  writer  in  the  Edinburgh  Review  for  July,  1886,  p.  34,  estimates  the 
addition  of  gold  to  Europe  from  the  United  States  and  Italy  as  about 

$500,000,000. 


42  MONEY  AND  PRICES 

check.  The  years  from  1867  to  1873  in  the  United 
States  witnessed  an  unlimited  expansion  of  extrava- 
gance and  overtrading,  such  as  has  been  seldom 
equalled,  accompanied  by  excessive  railway  building. 
Our  imports  were  out  of  all  proportion  to  our  ability 
to  pay  for  them.1  In  this  period,  also,  came  the 
Franco-German  War  of  1870,  and  the  distribution  of 
the  indemnity  of  war  by  Germany.  The  extraordi- 
nary and  exceptional  demand  for  commodities  in  periods 
of  war,  at  the  very  time  of  the  great  destruction  of 
wealth,  produced  an  unhealthy  state  of  affairs;  but 
on  the  outside  all  seemed  fair,  and  men  had  begun  to 
believe  that  prices  were  fated  always  to  rise.  The 
speculation  in  metals  (see  Chart  II)  in  1873  was  of  an 
unparalleled  kind.2  Nothing,  in  fact,  marks  this  period 
from  1850  to  1873  (as  compared  with  the  period  from 
1873  to  1886)  more  distinctly  than  the  extreme  varia- 
tions in  the  rate  of  discount  at  the  great  banks  of 
Europe.  There  were  all  the  evidences  of  an  unhealthy 
and  abnormal  condition  of  affairs.  But  the  unchecked 
demand,  when  the  actual  power  to  buy  had  been 
greatly  impaired,  could  not  go  on  forever.  When  it 
was  once  found  that  men  had  been  creating  liabilities 
beyond  their  means  to  meet  them,  the  end  had  come. 
The  crisis  of  1873  was  the  painful  return  to  a  conscious- 
ness of  the  real  situation,  after  a  prolonged  fever  of 
speculation  for  nearly  twenty  years,  which  had  spread 
over  many  countries.    The  effects  were  the  more  seri- 

1  C/.  Cairnes,  Leading  Principles,  pp.  364-372. 

2  See  Leroy-Beaulieu,  Revue  des  Deux  Monies,  May,  1886,  p.  393. 


CRISIS  OF   1873  43 

ous  because  the  disease  had  got  such  great  headway. 
The  period  since  1873,  on  the  other  hand,  is  stamped 
by  a  radical  change  in  methods  of  business;  and  a 
new  epoch  in  production  practically  dates  from  that 
year.  The  peculiar  changes  in  the  organization  of 
industry  will  themselves  sufficiently  explain  any  ex- 
ceptional characteristics  of  that  period. 

Those  commodities,  moreover,  for  which  the  demand 
in  the  period  of  overtrading  had  been  most  extended 
(and  which  were  of  a  character  capable  of  rapid  pro- 
duction) would  be  the  ones  in  regard  to  which,  after 
the  collapse,  there  would  be  the  greatest  difference 
between  the  power  of  production  and  the  now  lessened 
demand  based  on  normal  wants.  Demand  and  supply 
had  been  thrown  out  of  their  reciprocal  adjustment. 
Just  as  when  a  large  scaffold,  erected  by  fitting  one 
timber  or  board  to  another,  is  levelled  to  the  ground 
by  a  tornado,  exactly  the  same  structure  can  never 
again  be  reconstructed  out  of  the  old  materials — for 
reciprocal  parts  are  wanting — so,  after  a  serious  com- 
mercial disaster,  like  that  of  1873,  producers  must 
make  entirely  new  estimates  as  to  the  extent  of  de- 
mand, and  supply  must  be  adjusted  to  new  condi- 
tions. In  this  way,  a  great  derangement  of  trade  and 
credit  will  produce  unequal  effects  on  different  com- 
modities. 

§  5.  To  support  the  claim  that  we  were  forced  to 
deal  with  practically  new  conditions  of  production,  no 
facts  of  the  industrial  situation  since  1873  can  be  ad- 


44  MONEY  AND  PRICES 

duced  which  are  more  convincing  than  those  relating 
to  improvements  and  new  sources  of  supply.  The 
period  following  a  great  financial  upheaval  is  naturally 
crowded  with  improvements  in  processes  and  in  meth- 
ods of  lowering  the  cost  of  production.  Necessity 
becomes  the  mother  of  invention.  The  extent  to 
which  producers  have  been  driven  by  the  fierce 
competition  since  1873  to  cheapen  production  leads  to 
the  inquiry  how  far  the  fall  of  prices  can  be  accounted 
for  by  influences  connected  solely  with  commodities, 
and  not  with  gold.  If  these  influences  have  been 
widely  extended,  it  will  be  strong  evidence  that  the 
scarcity  of  gold  has  had  less  effect  than  some  suppose. 

In  order  to  take  a  definite  point  of  departure,  I  shall 
select  from  Mr.  Goschen's  list  of  articles1  twenty-three 
which  have  fallen  in  price,  and  see  whether  the  fall 
can  be  accounted  for  by  conditions  affecting  each 
commodity  itself.     (See  table  on  opposite  page.) 

Taking  thes*e  commodities  in  the  order  given,  we 
find  the  fall  in  price  of  sugar  was  due  to  the  revolution 
in  production  since  1873  stimulated  by  the  bounties 
on  beet-sugar  in  France,  Germany,  and  Russia.  The 
sugar  of  the  West  Indies  was  thus  deprived  of  the  vast 


1  Journal  of  Institute  of  Bankers,  May,  1883,  pp.  277-279.  These  com- 
modities, be  it  observed,  are  practically  the  same  as  those  given  by  Mr. 
Giffen  (see  Journal  Statist.  Soc,  1879,  p.  61,  and  Contemporary  Review, 
June,  1885)  to  show  the  effects  of  a  scarcity  of  gold  in  lowering  prices.  I 
have  omitted  from  Mr.  Goschen's  table  only  cocoa,  rice,  indigo,  cotton, 
hides,  jute,  and  hewn  timber;  of  which  cocoa,  cotton,  and  hides  have  prac- 
tically not  fallen  at  all;  rice  and  jute  are  affected  by  the  fall  of  silver,  while 
indigo  and  timber  are  subject  to  peculiar  fluctuations. 


CAUSES  OF  FALL  IN  PRICES 


45 


1873 


1883 


Sugar,  brown cwt 

"      West  Indian " 

Tea,  congou lb. 

Coffee,  Ceylon cwt 

Wheat qr. 

Pepper lb. 

Iron,  Scotch  pig ton 

Lead,  English " 

Copper " 

Tin,  foreign " 

Wool,  English lb. 

"      mohair " 

"      Australian " 

"      alpaca " 

Cochineal " 

Nitrate  of  soda cwt 

Saltpetre " 

Coals ton 

Paper 

Staves load 

Mahogany ' 

Railway-carriages 

Boots  and  shoes doz 


6 
21 

91 
142 


1 

1 

3 

10 

11 

in 

3 


s. 
16 
29 

87 
16 

7 

10 
o 
o 
2 

3 

2 

2 

2 

16 

10 

10 

o 

o 

12 
IO 

4 


d. 
6 
o 

o 
o 

7 
o 
o 
o 
o 
3 
3 
o 

9 

5 
6 
6 
o 

9 
o 
o 
o 
9 


12 
20 

5 

70 

2       6 

2        9 

13      15 


65 
93 


1 

5 

9 

85 

2 


o 
o 

1 
1 
1 

12 

19 

18 

16 

o 

5 
o 

17 


d. 

o 
o 
o 
o 
o 

S*A 

o 
o 
o 
o 

IO 

3 

IO 

o 
o 
o 
3 


European  market.  The  supply  was  increased  in  this 
way  without  any  connection  whatever  with  the  de- 
mand. From  1877  to  1882,  the  product  of  cane-sugar 
increased  33  per  cent.,  and  that  of  beet-sugar  40  per 
cent.1 

Tea  had  fallen  in  price,  owing  to  the  great  increase 
of  production  in  Japan,   which   rose   to   45,000,000 

1  Leroy-Beaulieu,  Revue  des  Deux  Mondes,  May,  1886,  p.  398.  According 
to  Fowler,  Appreciation  of  Gold,  p.  23,  the  price  of  sugar  in  1830  was  £50 
per  ton;  in  1840,  £40;  in  1880,  £25;  in  1886,  £16.  He  finds,  Contemporary 
Review,  April,  1885,  p.  539,  the  imports  of  unrefined  sugar  from  Germany 
into  England  in  1884  were  seven  and  three-fourths  million  hundredweights 
as  compared  with  four  and  one-half  million  hundredweights  in  1882. 


46  MONEY  AND  PRICES 

pounds,  to  the  enormous  extension  of  tea  cultivation 
in  India,  and  to  the  addition  of  large  supplies  from 
Java  and  Ceylon;  while,  unlike  coffee,  the  consump- 
tion of  tea  has  not  increased  in  proportion  to  the  in- 
creased production.1 

Coffee  had  not  fallen  in  price  to  the  extent  shown 
in  Mr.  Goschen's  table.  The  average  price  at  Ham- 
burg in  1866-70  was  expressed  by  142;  in  1876-80, 
by  207;  and  in  1881-85,  by  139.  Although  the  total 
production  has  increased,2  the  variations  in  the  seasons 
cause  violent  fluctuations.  The  fall  in  the  price  of 
Brazilian  coffee  is  accounted  for  by  the  extension  of 
railways  into  the  interior,  which  has  dispensed  with 
the  carriage  of  coffee  on  mules  to  the  seaports. 

A  fall  in  the  prices  of  wheat  and  agricultural  products 
seems  to  strengthen  Mr.  Goschen's  argument,  for  com- 
modities affected  by  the  law  of  diminishing  returns 
have  a  tendency  to  increase  in  price.  A  fall  in  the 
prices  of  such  articles,  therefore,  might  suggest  a  gen- 
eral cause,  like  the  scarcity  of  gold.  But  at  no  time  for 
centuries  have  there  been  in  operation  stronger  forces 
to  oppose  this  law  than  in  this  period.  The  tremen- 
dous gains  in  cheaper  transportation  have,  as  never  be- 


1  Tea  is  also  bought  wi:h  silver  in  the  East,  and,  like  jute,  its  gold  price 
has  fallen;  while  the  lowered  freights  have  also  had  a  serious  influence. 
The  exports  of  tea  from  India  had  quadrupled  since  1873.  See  Sauerbeck, 
ibid.,  p.  23. 

2  Leroy-Beaulieu,  ibid.,  gives  the  production  as  follows:  1855,  321,000,000 
tons;  1865,  422,000,000;  1875,  505,000,000;  1881,  588,000,000.  The  de- 
liveries of  Rio  coffee  in  New  York  in  1873  were  68,863  tons>  but  in  1886 
189,319  tons. 


CAUSES  OF  FALL  IN  PRICES  47 

fore,  opened  up  new  and  superior  wheat-growing  soils,1 
so  that  the  " margin  of  cultivation"  for  Europe  is  now 
found  in  the  rich  soils  of  India  and  the  United  States. 
The  effect  of  this  has  been,  irrespective  of  freight,  to 
raise  the  margin  of  cultivation  for  Europe.  It  is  only 
strange  that  the  price  of  wheat  has  not  fallen  more 
seriously.  Improved  methods  of  farming,  moreover, 
have  enabled  each  acre  to  produce  more  than  in  1870. 
Even  in  Europe,  Leroy-Beaulieu  thinks  that,  in  the 
twenty-five  years  since  i860,  food  has  increased  faster 
than  population. 

Pepper  had  not  fallen,  but  risen,  in  price  since  1873. 
For  1871-75  the  average  prices  at  Hamburg  are  ex- 
pressed by  229.7,  but  for  1881-85  °y  233-8. 

The  introduction  of  improvements  in  the  iron  in- 
dustry since  1873  shows  the  tendency  to  adopt  new 
devices  in  a  time  of  financial  depression.2  When  a 
business  is  profitable,  there  is  no  reason  for  stopping 
at  a  great  loss  each  day  to  introduce  better  processes. 
In  a  time  of  depression,  a  stoppage  is  no  loss.  The 
cost  of  production  of  the  coal,  ore,  and  lime  which 


1  The  United  States  in  1870  had  88,000,000  acres  planted  with  wheat, 
which  was  increased  to  157,000,000  acres  in  1884.  India,  moreover,  in- 
creased her  acreage  from  18,000,000  in  1870  to  25,000,000  in  1884;  while 
Europe  planted  440,000,000  in  1870  and  482,000,000  in  1884.  Leroy- 
Beaulieu,  ibid.,  p.  396.  Neumann-Spallert,  Uebersichten  der  Wellwirthschaft, 
p.  155,  states  that  from  1869  to  1879  the  production  of  cereals  in  Europe 
was  actually  doubled;  while  the  imports  of  grain  in  1869-70  were  valued 
at  $409,000,000,  and  in  1879  at  $817,000,000. 

2  A  few  years  after  the  panic  of  1873,  a  large  iron  manufacturer,  after 
lamenting  the  poor  prospects  in  his  industry,  said :  "  And  yet  we  were  never 
making  so  many  improvements  as  now." 


48  MONEY  AND  PRICES 

enter  into  the  production  of  pig  iron,  writes  Mr.  Joseph 
D.  Weeks,  had  been  lowered  by  the  following  agencies: 

"The  use  of  steam-drills  instead  of  hand-drills,  of 
coal-cutting  machines  for  the  pick  of  the  miner,  of 
compressed  air  in  place  of  steam,  of  locomotive  and 
water  carriage  in  place  of  mules  and  of  human  carriage, 
of  dynamite  and  its  associate  explosives  in  place  of 
powder,  of  lime  and  water  cartridges  instead  of  powder 
cartridges,  of  the  long-walled  system  of  mining  in- 
stead of  the  pillar  and  room,  etc.  In  the  blast-furnaces 
there  have  been  important  changes  in  the  lines  of  the 
furnaces — in  the  methods  of  blowing  and  admitting 
the  air,  of  charging  the  furnaces,  of  using  the  metal 
without  allowing  it  to  become  cold,  and  of  improved 
hoisting  apparatus.  In  the  rolling-mill,  the  improve- 
ments are  almost  without  number.  Some  of  them  are 
growths;  that  is,  a  little  change  to-day,  another  change 
to-morrow,  until  in  months'  or  years'  time  a  gradual 
improvement  has  taken  place,  as  compared  with  the 
years  before,  that  would  hardly  be  believed  without 
making  the  comparison.  I  presume  that,  had  I  time, 
I  could  name  at  least  five  hundred  improvements, 
some  that  have  decreased  cost  and  others  that  have 
improved  quality." 

Even  in  the  case  of  improvements  introduced  before 
1873,  it  has  been  only  since  then  that  their  use  has 
been  applied  on  an  extended  scale.  The  manner  in 
which  improvements  have  lowered  the  price  of  iron 
illustrates  the  characteristics  of  modern  industries  in 
general. 


CAUSES  OF  FALL  IN  PRICES  49 

The  price  of  lead  had  fallen,  as  is  well  known,  be- 
cause of  the  extraordinary  amount  of  it  liberated  in 
treating  the  argentiferous  lead  ores  discovered  in 
Colorado,  Montana,  Nevada,  Utah,  and  other  Western 
States  and  Territories.  The  lead,  being  produced  as 
secondary  to  the  yield  of  silver,  was  sold  for  what  it 
would  bring,1  regardless  of  the  conditions  affecting 
the  mines  worked  solely  for  lead. 

The  effect  on  prices  of  a  sudden  opening  of  new  sup- 
plies has  never  been  more  marked  than  in  the  matter 
of  copper.  The  discovery  in  the  late  seventies  of  im- 
mense deposits  in  Arizona,  Montana,  and  Spain  caused 
a  revolution  in  this  industry.  The  great  yield  in  the 
West  utterly  overwhelmed  the  Lake  Superior  combina- 
tion, which  formerly  controlled  the  market  in  the 
United  States.2  In  the  spring  of  1882,  copper  here 
fell  from  twenty-two  cents  per  pound  in  the  spring  of 
1882  to  only  eleven  and  a  half  cents  in  1885  solely 
from  the  causes  named. 

Tin  had  not  fallen  seriously  in  price.  The  average 
price  in  1884  at  Hamburg  was  about  the  same  as  for 
1866-67.  The  unusual  speculation  in  metals  about 
1873  (see  Chart  II)  carried  the  price  of  tin  higher  than 
it  had  been  for  about  forty  years,  so  that  the  quota- 
tion for  1873  is  30  per  cent,  above  the  ordinary  prices. 

1  The  white  lead  corroders  west  of  the  Mississippi  getting  their  lead  at  so 
low  a  price,  the  corroders  on  the  Atlantic  seaboard  were  placed  in  a  very 
critical  position.  The  prices  of  paints,  also,  had  thus  greatly  fallen  at 
that  time. 

1  The  Anaconda  Mine  in  Montana  led  in  the  shipment  to  Europe  of  the 
vast  excess  of  supply,  and  broke  down  the  price  abroad. 


50  MONEY  AND  PRICES 

Passing  this  by,  however,  the  downward  movement 
since  1873,  so  far  as  it  exists,  is  fully  accounted  for  by 
the  discovery  of  large  deposits  of  tin  in  New  South 
Wales,  Queensland,  and  Tasmania.1 

The  great  decline  in  the  prices  of  English  wool  (the 
grade  known  as  "Lincoln"),  mohair,  and  alpaca  has  a 
curious  cause.  Before  1874  they  were  used  on  a  vast 
scale  in  the  manufacture  of  stiff,  hard,  and  lustrous 
fabrics  for  ladies'  wear  of  which  " alpaca"  is  a  type. 
But,  by  a  sudden  freak  of  fashion,  about  1874  these 
goods  were  wholly  given  up;  and  their  place  was  taken 
by  soft  and  pliable  fabrics  made  from  merino.  The 
change  was  so  marked  as  practically  to  destroy  the 
demand  for  English  long  combing  wools  as  well  as  for 
mohair  and  alpaca.2  The  price  of  the  fine  wools,  how- 
ever, has  been  affected  by  the  greatly  increased  prod- 
uct of  Australia  and  South  America.3 

Cochineal  gives  another  illustration  of  the  changes 
in  modern  industries.  Cochineal,  for  which  an  exten- 
sive demand  formerly  existed  in  dyeing  and  printing 
cloths,  has  been  superseded  by  the  aniline  dyes,  owing 
to  the  discovery  of  coloring  materials  in  hydrocarbons, 


1  See  Mineral  Resources  of  the  United  States,  1883-84.  I  am  also  indebted 
for  information  to  Mr.  R.  W.  Raymond,  of  New  York. 

2  Lord  Penzance,  Nineteenth  Century,  September,  1886,  says  an  English 
farmer  who  formerly  received  £1,400  for  his  yearly  clip  then  got  only  £600. 
For  very  careful  tables  of  prices  of  English  wools  and  for  information,  I 
was  much  indebted  to  Mr.  George  William  Bond  and  to  Mr.  John  L.  Hayes. 

3  Leroy-Beaulieu,  ibid.,  p.  397,  finds  a  close  connection  between  the  falling 
prices  of  fine  wool  and  the  shipments  from  Australia,  the  Cape,  and  La 
Plata.  The  number  of  bales  imported  in  1864  was  458,000;  in  1868,  879,000; 
in  1877,  1,272,000;  in  1885,  1,740,000. 


CAUSES  OF  FALL  IN  PRICES  51 

drawn  chiefly  from  coal  and  petroleum.  The  yarn 
was  weakened  by  cochineal,  and  spinners  were  glad 
enough  to  find  that  the  cheaper  aniline  dyes  gave  as 
brilliant  colors  without  weakening  the  yarn. 

Nitrate  of  soda  and  saltpetre  fell  in  price  because  of 
the  excessive  yield  from  the  deposits  of  Western  South 
America.  The  exportation  of  "Chili  saltpetre"  (ni- 
trate of  soda)  has  of  late  been  larger  than  the  world's 
consumption.1  The  average  price  for  1881-85  is  about 
the  same  as  for  the  years  1874-76.  The  article,  how- 
ever, is  subject  to  great  fluctuations  of  price. 

Coal  varies  greatly  in  price  from  time  to  time;  but 
about  1873  it  underwent  an  exceptional  rise  in  price  in 
England,  while  the  later  production  was  forced  in  an 
unusual  way.  In  twenty  years  there  was  an  increase 
of  145  per  cent.  Apart  from  the  improvements  in 
mining  already  referred  to,  iron  could  be  smelted  with 
one-half  the  coal  formerly  required,  and  so  required 
less  coal;  while  the  growth  of  English  stock  companies 
stimulated  the  activity  of  producers. 

The  industrial  gains  of  society  over  nature  were 
especially  prominent  in  the  case  of  paper.  A  pulp 
made  from  the  fibre  of  wood,  instead  of  rags,  is  used 
in  its  manufacture.  Not  only  is  the  wood-pulp  ground 
by  machinery,  but  it  is  also  prepared  by  a  chemical 


1  Wagner's  Jahresbericht  for  1884  states  the  facts  as  follows  in  metric 
tons: 

1881  1882  1883 

Exports  from  South  America 319,000        410,000        530,000 

World's  consumption 286,000        372,000        468,000 


52  MONEY  AND  PRICES 

process  of  decomposition.  The  latter  variety  is  used 
for  the  better  grades  of  paper.  Of  two  kinds  of  book 
paper  which  in  1873  were  sold  at  seventeen  and  four- 
teen cents  per  pound  in  the  United  States,  the  price, 
owing  to  the  new  methods,  had  fallen  one-half.  The 
use  of  pulp,  moreover,  cheapened  the  rags  which  are 
still  partially  used.  Where  the  machine-made  pulp 
was  used,  as  in  coarser  kinds  of  paper,  like  newspaper 
stock,  the  fall  in  price  was  still  more  marked.  Manu- 
facturers, also,  were  learning  how  to  use  these  proc- 
esses to  better  effect;  and  the  machinery  was  being 
steadily  improved. 

The  supply  of  white-oak  staves  for  the  United  States, 
since  the  Civil  War,  has  been  drawn  from  Arkansas 
and  Tennessee,  which  have  been  penetrated  by  rail- 
ways. This  has  made  a  vast  difference  in  their  price; 
but  inferior  wood  is  also  used,  which  would  have  a 
similar  effect  on  quotations. 

Mahogany  has  been  affected  by  exceptional  influ- 
ences. The  chief  supply  formerly  came  from  Cuba 
and  San  Domingo;  but  during  the  rebellion  in  Cuba, 
from  1868  to  1878,  new  sources  of  supply  were  sought 
for  in  Mexico,  where  operations  were  stimulated  by 
the  unusually  high  prices  about  1873  due  to  scarcity. 
After  the  close  of  the  rebellion,  Cuba  again  furnished 
mahogany;  and  her  exportations  have  since  been  in- 
creasing. This  is  sufficient  to  account  for  the  fall  in 
price,  apart  from  the  fact  that  inferior  wood  affects 
the  quotations. 


CAUSES  OF  FALL  IN  PRICES  53 

The  fall  in  the  prices  of  iron  and  steel,  and  all  ma- 
terials* entering  into  the  manufacture  of  railroad-cars, 
together  with  improvements  in  the  tools  and  process 
of  manufacture,  would,  in  the  United  States,  have 
accounted  for  any  decline  in  the  price  of  cars.  The 
increase  of  strength,  moreover,  makes  a  great  differ- 
ence in  the  weight  to  be  carried,  so  that  the  superiority 
of  the  new  cars  had  caused  a  depreciation  in  the  value 
of  the  old  ones.1 

The  marked  progress  of  improvements  is  also  seen 
in  the  making  of  boots  and  shoes.  In  1870  the  op- 
erative was  also  a  skilled  shoemaker:  now  he  is  known 
only  as  an  edge-trimmer,  an  edge-setter,  or  a  laster, 
because  machinery  has  been  introduced  which  per- 
forms a  special  part  of  the  manufacture.  One  ma- 
chine trims  the  sole,  another  the  heel,  another  polishes 
the  shoe;  another,  a  beating-out  machine,  disposes  of 
a  whole  row  of  shoes  instead  of  one,  as  in  former  days. 
The  buttonholes  are  now  worked  by  a  machine  which 
enables  one  operative  to  make  five  thousand  in  a  day. 
In  the  McKay  sewing-machine,  on  which  four  hundred 
pairs  were  sewed  in  a  day,  a  small  arm  made  two 
movements  to  throw  one  loop  of  thread  over  the  needle; 
but,  when  it  occurred  to  the  inventors  to  cause  the 
arm  to  throw  one  loop  at  each  movement,  the  opera- 
tive was  enabled  to  sew  eight  hundred  to  one  thousand 


1 1  am  indebted  for  information  to  Professor  (now  President)  Arthur  T. 
Hadley  and  to  Mr.  M.  N.  Forney,  secretary  of  the  Master  Car-Builders' 
Association,  New  York. 


54  MONEY  AND  PRICES 

pairs  in  a  day.1  Such  changes  are  constantly  going 
on,  and  it  is  little  marvel  that  shoes  are  better  made 
and  lower  in  price. 

The  fall  of  prices  shown  by  Mr.  Goschen  can  thus, 
without  a  question,  be  explained  by  causes  other  than 
the  scarcity  of  gold.  The  course  of  progress,  more- 
over, has  gone  farther  and  in  more  directions  than 
those  mentioned  by  him.2  Suffice  it  to  conclude  with 
the  facts  in  regard  to  the  lowering  of  charges  for  trans- 
portation, which,  affect  the  prices  of  a  great  range  of 
commodities.  The  average  rates  of  freight  for  wheat 
from  Chicago  to  New  York3  had  fallen  by  1885  to  less 
than  40  per  cent,  of  the  rates  of  1873,  whether  we 
refer  to  transit  by  rail  or  canal.  The  charges  for 
ocean  transportation  had  fallen  quite  as  much.4    One 


1  The  Goodyear  McKay  welt-machine  sews  the  welt  onto  the  upper 
leather,  and  then  sews  the  outer  sole  onto  the  welt,  giving  practically  the 
advantages  of  hand-sewed  work  at  a  less  price. 

2  As  illustrations,  we  may  point  to  the  character  of  the  improvements 
introduced  in  the  making  of  glass  (which  led  to  the  labor  riots  at  Charleroi, 
in  Belgium).  One  new  Siemens  "tank-furnace"  does  the  work  of  eight  old 
coal-furnaces,  while  it  requires  only  four  men  instead  of  twenty-eight. 
Common  window-glass  has  consequently  fallen  in  price  one-half.  (See 
Fowler,  Appreciation  of  Gold,  p.  39.)  Again,  steel  rails  can  now  be  made 
at  a  less  price  than  iron  rails  were  made  a  few  years  ago,  owing  to  well- 
known  inventions.  Still,  again,  in  the  cotton-mills,  spindles  which  revolved 
four  thousand  times  in  a  minute  about  1873  now  revolve  ten  thousand 
times  in  a  minute. 

In  connection  with  the  great  increase  of  supplies,  see  a  suggestive  investi- 
gation by  Mr.  Luke  Hansard,  in  the  Report  of  the  Royal  Commission  on  the 
Depression  of  Trade,  Appendix,  pp.  405-414. 

*  United  States  Bureau  of  Statistics,  January,  1885. 

*  See  Contemporary  Review,  April,  1885,  p.  545,  where  Fowler  gives  the 
charges  from  Calcutta  on  jute,  wheat,  linseed,  and  rape-seed,  from  1881  to 
1884.  See,  also,  Leroy-Beaulieu,  ibid.,  p.  401;  Fowler,  Appreciation  of 
Gold,  pp.  45,  71;  The  Public,  December  22,  1881. 


CAUSES  OF  FALL  IN  PRICES  55 

of  the  mechanical  triumphs  of  recent  years  has  been 
the  transformation  of  the  old  steamship  into  the  new,1 
which,  taken  in  connection  with  the  improved  grain- 
elevators  and  various  expedients  for  receiving  and 
discharging  cargoes,  warranted  the  statement  that  a 
single  sailor  in  1885  transported  two  times  as  much 
as  he  did  in  1870,  three  times  as  much  as  in  i860,  and 
four  times  as  much  as  in  1850.  The  fall  in  the  rates 
of  freight  from  Calcutta  to  London  would  alone  ac- 
count for  the  fall  in  price  of  several  articles  in  Mr. 
Goschen's  list.  The  tolls  and  pilotage  on  the  Suez 
Canal  had  fallen  about  one-third  since  1873.2 

The  steady  extension  of  the  electric  telegraph,  to- 
gether with  changes  in  methods  of  doing  business, 
helped  to  lower  the  cost  of  production  of  many  com- 
modities. The  means  of  instant  communication  with 
agents  and  correspondents  in  opposite  parts  of  the  world 
wholly  obviated  the  carrying  of  large  stocks  of  goods, 
and  economized  the  use  of  capital  like  a  labor-saving 
machine.  The  whole  world  was  thus  opened  to  any 
dealer,  and  the  middleman  was  less  used  than  formerly. 
Producers  were  brought  nearer  to  consumers. 

Of  the  fall  of  prices  in  his  table,  Mr.  Goschen  says, 
"I  am  bound  to  say  it  appears  to  me  that  these  fig- 
ures reveal  an  extraordinary  state  of  things";    and 

1  The  improved  ship,  being  a  better  and  cheaper  carrying  instrument,  is 
itself  the  cause  of  the  depreciation  in  value  of  older  ships.  In  fact,  this  is 
the  natural  result  of  improvements.  This  depreciation  of  capitalized  prop- 
erty, owing  to  improvements,  is  Mr.  Frewen's  real  difficulty,  and  is  not  ex- 
plained by  the  scarcity  of  gold. 

1  Leroy-Beaulieu,  ibid.,  p.  4. 


56  MONEY  AND  PRICES 

he  thinks  it  is  due  to  the  scarcity  of  gold.  It  has 
been  shown  conclusively,  however,  that,  in  every  case 
investigated,  a  cause  peculiar  to  the  commodity  has 
been  found,  without  the  need  of  referring  to  a  general 
cause  connected  with  gold.  The  opening  of  better 
lands  to  cultivation,  the  discovery  of  richer  mineral 
deposits,  the  perfection  and  cheapening  of  transporta- 
tion by  which  all  these  distant  resources  have  become 
easily  available,  the  increased  mobility  of  labor  and 
capital  in  finding  out  these  new  resources,  the  steady 
and  extraordinary  development  of  mechanical  and 
chemical  improvements  in  a  great  number  of  indus- 
tries— these  are  some  of  the  main  causes1  which  had 
affected  the  prices  of  a  variety  of  commodities  since 

1873. 
Laveleye,    however,    remarks2   that   improvements 

made  even  greater  progress  in  the  years  1860-70  than 
they  had  since  then;  but  that  prices  in  the  former 
period  rose  from  18  to  20  per  cent.  Why,  then,  he 
urges,  can  the  same  cause  have  produced  an  opposite 
effect  since  1873  ?  To  this,  it  must  be  said :  If  improve- 
ments multiplied  before  1873,  and  yet  the  prices  of  the 
commodities  affected  did  not  fall,  the  expected  result 
must  have  been  masked  or  counteracted  by  other  in- 
fluences. Surely,  no  one  will  contend  for  a  moment 
that  improved  processes  in  particular  industries  will 

1  Courcelle-Seneuil  (Journal  des  ficonomistes,  August,  1886,  p.  163)  finds 
that  the  completion  of  a  period  within  which  productive  railways  can  be 
built  has  had  an  important  influence  in  lowering  prices  since  1883. 

*  Contemporary  Review,  May,  1886,  p.  621. 


FORCES  COUNTERACTING  IMPROVEMENTS    57 

not  lower  the  value  of  commodities  relatively  to  gold, 
if  gold  has  remained  unchanged  in  its  conditions  of 
production.  This  would  lead  one  to  suppose  that  the 
prices  of  many  articles  before  1873  must  have  shown 
a  fall,  had  it  not  been  for  the  vast  extension  of  specu- 
lation and  overtrading  and  the  influences  of  the  new 
gold.  But,  after  the  inflation  and  abnormal  condi- 
tions of  the  previous  period  were  left  behind,  the  effect 
of  improvements  became  more  clearly  apparent.  In 
fact,  when  one  considers  that,  with  all  the  unparalleled 
development  of  cheapening  processes  since  1850  in 
almost  every  industry  which  ministers  to  human 
wants,  prices  in  1885  were  no  lower  or,  by  the  Hamburg 
figures,  even  10  per  cent,  above  the  level  of  prices 
in  1847-50,  one  is  penetrated  by  the  conviction  that 
prices  are  still  buoyed  up  by  the  high  tide  of  an  abun- 
dant gold  supply.  Else  why  should  prices  not  be  much 
lower  than  in  1850?  "If,  under  such  circumstances," 
says  Cairnes,1  "prices  did  not  fall,  that  could  only  be 

1  "A  rise  in  the  price  of  commodities,  if  general,  implies  commonly  a  fall 
in  the  value  of  money;  but,  according  to  the  ordinary  use  of  language,  alike 
by  economists  and  in  common  speech,  money  would,  I  apprehend,  in  cer- 
tain circumstances,  be  said  to  have  fallen  in  value,  even  though  the  prices 
of  large  classes  of  commodities  remained  unaffected.  For  example,  sup- 
posing improvements  to  have  been  effected  in  some  branch  of  production, 
resulting  in  a  diminished  cost  of  the  commodity,  the  value  of  moneyre- 
maining  the  same,  prices  would  fall.  If,  under  such  circumstances,  prices 
did  not  fall,  that  could  only  be  because  money  had  not  remained  the  same, 
but  had  fallen  in  value.  The  continuance  of  prices  unaltered  would,  there- 
fore, under  such  circumstances,  amount  to  proof  of  a  fall  in  the  value  of 
gold.  Now,  when,  in  connection  with  this  consideration,  we  take  account 
of  the  fact  that  over  the  greater  portion  of  the  field  of  British  industry  im- 
provement is  constantly  taking  place,  it  is  obvious  that  the  mere  movements 
of  prices  here,  taken  without  reference  to  the  conditions  of  production, 
are  no  sure  criterion  of  changes  in  the  value  of  gold." — Essays,  p.  106. 


58  MONEY  AND  PRICES 

because  money  had  not  remained  the  same,  but  had 
fallen  in  value."  Or  it  would  be  more  correct  to  say 
that  the  cost  of  producing  gold  had  fallen;  for,  if 
prices  are  now  nearly  the  same  as  in  1850,  in  reality 
the  cost  of  production  of  both  commodities  and  gold 
has  fallen,  leaving  them  relatively  to  each  other  in 
very  much  the  same  position  as  in  the  beginning. 
When  we  once  fully  apprehend  the  influences  of  the 
progress  of  society  on  prices,  we  cannot  admit  that  a 
fall  of  prices  is  connected  in  any  necessary  way  with 
a  scarcity  of  gold. 

§  6.  The  preceding  discussion,  however,  does  not 
account  for  a  general  fall  in  prices.  If  the  fall  of 
prices  had  been  general,  it  might  suggest  a  single  cause 
affecting  all  commodities,  such  as  the  scarcity  of  the 
medium  by  which  goods  are  exchanged.  In  fact,  it 
seems  to  be  quite  necessary  to  a  theory  which  explains 
the  fall  in  prices  by  the  scarcity  of  gold  that  the  fall 
should  have  been  universal.  And  this  is  so  stated. 
"The  most  disastrous  characteristic,"  remarked  Mr. 
Giffen,1  "of  the  recent  fall  of  prices  has  been  the  descent 
all  round  to  a  lower  range  than  that  of  which  there 
had  been  any  previous  experience."  In  the  case  of 
English  exports  and  imports,  there  will  be  found  a 

1  Contemporary  Review,  June,  1885,  p.  809.  This  is  the  ground  taken  by 
Laveleye,  Contemporary  Review,  May,  1886,  p.  621.  Frewen  (Nineteenth 
Century,  October,  1885,  p.  601)  says:  "Prices  have  all  fallen  more  than  20 
per  cent.  .  .  .  Prices  all  round  are  falling  lower  and  lower  still,  because 
that  circulating  medium  which  measures  values  has  diminished." 


THE  HAMBURG  TABLES 


59 


large  collection  of  commodities  which  have  actually 
risen  in  price  since  1873,  although  that  was  a  year  of 
abnormally  high  prices.  Mr.  Palgrave1  points  out  a 
rise  in  price  in  1886,  as  compared  with  1881,  of  six  of 
the  articles  used  in  the  Economist  table.  Moreover, 
in  the  same  list,  comparing  the  period  before  1875 
with  that  since  1880,  sugar,  tea,  tobacco,  butcher's 
meat,  raw  silk,  and  leather  had  been  at  times  higher 
in  the  latter  than  in  the  former  period. 

The  Hamburg  tables  also  give  additional  evidence 
that  prices  were  not  all  moving  in  the  same  direction. 
I  have  collected2  twenty-one  articles,  out  of  the  one 
hundred  quoted  at  Hamburg,  which  showed  an  up- 
ward tendency,  by  comparing  the  average  prices  of 
1881-85  with  those  of  1871-75.  The  average  of  the 
numbers  representing  the  prices  of  these  twenty-one 
articles  in  the  period  1871-75  was  164.2,  and  in  1881- 
85,  183.8    In  the  same  lists  there  can  be  found  at  least 


1  Report  of  the  Royal  Commission,  1886,  Appendix,  p.  330.  The  articles 
are  Jamaica  rum,  potatoes,  flax,  hemp,  ashes,  and  tin  (although  tin  is 
quoted  by  Mr.  Goschen  as  showing  a  great  decline  in  1883). 


Malt 

Buckwheat. . 

Hops 

Veal 

Mutton 

Pork 

Butter 

Bristles 

Buffalo  horns 

Herring 

Dried  fish.  .  . 


1871-7S 


140 
131 
339 
153 
135 
126 
188 
201 
184 
149 
163 


h-85 


143-5 
135-5 
355-3 
183.0 
158. 1 
126.9 
191. 6 
225.9 
235-9 
165.8 
184. 1 


Almonds.  . . 

Wine 

Champagne 

Cocoa 

Pepper 

Allspice 

Rum 

Ivory 

Flax 

Gum  elastic 


1871-75 


in. 1 
221.9 
121. 2 
156.8 
229.7 
60.4 
181. 8 
1850 
123. 1 
141. 6 


1881-85 


127 
284 
124 
230 

233 
72 

199 
194 
128 
157 


6o 


MONEY  AND  PRICES 


twenty-one  articles1  which  had  shown  a  decided  ten- 
dency to  fall  in  price.  The  remaining  articles  do  not 
show  a  marked  movement  in  either  direction.  For- 
sell2  makes  an  interesting  analysis  of  the  whole  one 
hundred  into  two  groups,  classifying  those  which  show 
a  tendency  to  rise  and  those  which  show  a  tendency 
to  fall.  In  the  first  class  he  includes  fifty-one  articles, 
and  in  the  second  forty-nine  articles,  with  the  follow- 
ing results  in  averages: 


1847-50 

1851-60 

1861-70 

1871-75 

1876-80 

1881-85 

I 
II, 

IOO 
IOO 

125.3 
109.7 

1303 

114. 6 

147. 1 
121. 7 

143-7 
103.7 

146.4 
96.7 

Whether  to  draw  inferences  as  to  a  scarcity  of  gold 
from  forty-nine  articles,  or  to  infer  that  gold  was  abun- 
dant, according  to  the  prices  of  fifty-one  articles,  is  an 
awkward  dilemma  for  those  who  think  that  prices  give 
direct  evidence  as  to  the  quantity  of  money.  As  For- 
sell  remarks,  the  theory  of  a  scarcity  of  gold  is  incom- 
patible with  the  rise3  in  price  of  so  many  commodities. 

1  Wheat,  flour,  rape-seed  oil,  linseed-oil,  olive-oil,  palm-oil,  allspice,  rice, 
sago,  cochineal,  logwood,  quicksilver,  salt,  chalk,  silk,  wool,  potash,  pearl- 
ash,  soda,  stearine  candles,  and  wax. 

2  The  Appreciation  of  Gold,  etc.,  p.  22. 

8  Mr.  Giffen  {Journal  of  Statistical  Society,  March,  1879,  p.  306)  referred 
to  the  rise  in  price  of  textiles  and  metals  (and  their  manufactures)  in  186 1- 
65,  their  fall  in  1865-68,  their  rise  again  in  1868-73,  and  their  fall  again  in 
1873-79;  and  yet  he  could  not  claim  that  there  was  any  such  corresponding 
changes  in  the  quantity  of  gold  in  the  world.  Such  fluctuations  drove  Mul- 
hall  {Contemporary  Review,  August,  1885)  to  the  extreme  of  asserting  the 
absence  of  any  connection  whatever  between  prices  and  the  quantity  of 
gold.  See,  also,  the  irregularity  of  movement  in  the  prices  in  Bourne's 
table,  Journal  of  Statistical  Society,  ibid.,  pp.  41  i>  412. 


AS  TO  SCARCITY  OF   GOLD  61 

The  purchasing  power  of  gold,  moreover,  has  been 
indicated  in  other  ways,  such  as  the  higher  prices  paid 
for  services,  domestic  servants,  rents  for  houses,  and 
for  a  vast  number  of  things  which,  in  their  nature, 
cannot  be  included  in  price-lists,  but  which  absorb  a 
large  part  of  every  one's  expenditure. 

§  7.  From  the  foregoing  statements,  it  must  be  evi- 
dent that  the  connection  between  prices  and  the  quan- 
tity of  gold  is  not  so  simple  as  some  would  have  us  sup- 
pose. But  Mr.  Goschen  and  his  followers  saw  reasons, 
in  the  direct  and  visible  demands  for  gold,  since  silver 
was  demonetized  by  Germany,  to  believe  that  gold1 
must  have  been  scarce  enough  to  cause  a  general  de- 
cline in  prices. 

"Gold  to  the  amount  of  nearly  £200,000,000  has 
been  required  for  supplying  Germany,  the  United 
States,  and  Italy  with  new  gold  currencies.2  This  ex- 
traordinary demand  fell  on  a  diminished  supply.  The 
annual  production  of  gold  during  the  first  five  years 

1  Journal  of  Institute  of  Bankers,  May,  1883,  p.  302.  Giffen  {Contemporary 
Review,  June,  1885,  p.  815)  computed  the  demand  in  the  previous  thirteen 
years  of  Germany  at  £80,000,000,  of  the  United  States  at  £82,000,000  (£34,- 
000,000  for  imports  less  exports  and  £48,000,000  for  home  production),  and 
of  Italy  at  £20,000,000. 

2  Laveleye  {Contemporary  Review,  May,  1886,  p.  625)  saw  in  the  coinage 
by  various  countries  since  1873  a  cause  for  alarm.  The  coinage  of  £220,- 
000,000  since  that  year  he  stated  to  be  equal  to  the  production  of  ten  years. 
It  is  impossible,  however,  to  judge  of  the  demand  for  gold  by  the  amounts 
coined,  because  there  are  received  at  the  mints  foreign  and  domestic  coins, 
which  should  not  be  counted  twice;  and  old  plate  is  also  brought  to  be 
coined.  Mulhall  probably  overstates  the  case  when  he  says  {Contemporary 
Review,  August,  1885)  the  annual  average  coinage  of  the  world,  1870-84, 


62  MONEY  AND  PRICES 

after  the  discoveries  of  185 1  averaged  nearly  £30,000,- 
000.  It  now  amounts  to  less  than  £20,000,000.  The 
new  demand  has  been  equal  to  the  total  supply  of  ten 
years.  At  the  same  time,  we  have  to  reckon  with  the 
normal  demand  for  arts  and  manufactures,1  while  more 
gold  has  also  been  required  to  meet  the  wants  of  an 
increasing  population  and  an  increased  balance  of 
transactions  in  all  gold-using  countries. 

"No  evidence  is  before  us  to  prove  that  a  fresh  de- 
velopment of  banking  expedients  has  to  such  an  ex- 
tent further  economized  the  use  of  gold  as  to  neutralize 
this  normal  rate  of  increase.  On  the  contrary,  it  is 
believed  that,  in  England  alone,  the  gold  circulation 
has  grown  by  £20,000,000  in  ten  years." 

Now,  if  the  existing  stock  of  gold  in  the  world,  in- 
creased as  it  has  been  since  1850,  has  not  been  capable 
of  meeting  the  demands  specified  by  Mr.  Goschen,  in 
what  way  would  the  effects  of  a  scarcity  manifest 
themselves?  If  the  insufficient  quantity  of  gold  has 
lowered  prices,  the  process  must  have  shown  itself  at 
some  point  in  the  machinery  by  which  commodities 

was  £14,000,000,  of  which  one-half  came  from  recoinage  of  old  coins.  One- 
fifth  of  the  United  States  gold  coinage  in  1885  was  from  foreign  coins  and 
jewellers'  bars,  plate,  etc.,  to  the  amount  of  about  $10,000,000.  At  least, 
the  coinage  since  1873  was  not  a  demand  additional  to  that  referred  to  by 
Mr.  Goschen.  But,  when  Laveleye  (ibid.,  pp.  626,  627)  referred  to  the 
falling  off  in  the  coinage  of  gold  and  silver  since  1879  in  England  and  France 
as  evidence  of  a  scarcity  of  gold,  he  forgot  that  this  was,  on  the  very  surface, 
a  reason  for  believing  that  the  coinage  was  already  so  plentiful  that  no  more 
was  called  for  in  these  countries. 

1  Soetbeer  (Malerialien,  p.  38)  placed  the  annual  consumption  of  gold  in 
the  arts  at  90,000  kilograms,  or  nearly  $60,000,000,  and  of  silver  at  515,000 
kilograms,  or  about  $21,000,000.  An  abundance  of  gold,  however,  would 
not  affect  the  demand  for  plate,  etc.,  by  lowering  the  price  of  such  articles; 
for  the  price  in  gold  would  not  change. 


GOLD   SCARCITY  AND   THE   MARKET       63 

are  exchanged.  Fortunately,  Mr.  Giffen1  gave  an  ex- 
planation as  to  how  he  thought  this  scarcity  of  gold 
had  made  itself  felt: 

"A  sudden  pressure  on  the  stock  of  the  precious 
metals  at  a  given  period  tends  to  disturb  the  money 
markets  of  the  countries  using  them,  makes  money 
dear,  or  creates  a  steady  apprehension  that  it  may  at 
any  moment  become  dear,  and  so,  by  weakening  the 
speculation  in  commodities  and  making  it  really  diffi- 
cult for  merchants  and  traders  to  hold  the  stocks  they 
would  otherwise  hold,  contracts  business  and  assists  a 
fall  in  prices." 

And,  later,2  he  asserted  that — 

"The  rate  of  discount  and  the  interest  of  money  do 
not  depend  on  the  scarcity  or  abundance  of  'money,' 
using  the  term  in  its  strict  sense,  but  on  the  scarcity 
or  abundance  of  capital  relative  to  the  demands  of 
borrowers." 

As  a  consequence,  Mr.  Giffen,  in  looking  over  the 
years  since  1871,  has  been  struck  with  the  succession 
of  stringencies  in  the  money  market  directly  traceable 
to  the  difficulty  of  getting  gold.  Now,  curiously 
enough,  the  period  before  1873  was  more  remarkable 
for  these  disturbances  than  was  the  succeeding  period. 
From  1855  to  1873,  tne  rate  at  the  Bank  of  England 

1  Journal  of  Statistical  Society,  June,  1879,  p.  49.  He  claimed,  also  (ibid., 
p.  445),  that,  after  a  fall  in  prices  due  to  a  scarcity  of  gold,  there  was  an 
apparent  superabundance  of  gold,  due  to  the  lower  range  of  prices.  Or,  as 
Laveleye  puts  it:  "The  more  rare  it  [gold]  becomes,  the  more  it  apparently 
exceeds  the  demand"  (Contemporary  Review,  May,  1886,  p.  631). 

1  Contemporary  Review,  June,  1885,  p.  816. 


64  MONEY  AND  PRICES 

rose  beyond  6  per  cent,  eleven  times,  and  twice  to  10 
per  cent.;  at  the  Bank  of  France,  for  the  same  years, 
the  rate  rose  above  5  per  cent,  ten  times,  and  once  to 
9  per  cent. ;  at  the  Bank  of  Germany,  it  rose  six  times 
beyond  6  per  cent.,  and  once  to  9  per  cent.  There 
must  have  been  great  difficulty  in  getting  gold  before 
1873,  if  we  are  to  judge  from  the  frequency  and  in- 
tensity of  the  disturbances  in  the  money  market. 
But  there  is  no  corresponding  evidence  as  to  a  scarcity 
of  gold  to  be  drawn  from  such  disturbances  since  1873.1 
In  fact,  in  the  very  machinery  of  borrowing  and  lend- 
ing, where  any  such  change  might  show  itself,  there  was 
no  evidence  whatever  of  a  scarcity  of  gold. 

In  order  to  test  this  question  thoroughly,  I  compiled2 
the  table  on  page  65,  which  shows  the  total  note  circula- 
tion and  the  amount  and  character  of  the  specie  re- 
serves in  all  the  principal  banks  of  Europe  and  the 
United  States  (000  omitted): 

From  these  figures  it  will  be  seen  that  the  reserves 
in  the  banks  of  the  civilized  world  show  a  very  remark- 
able increase  in  gold.  Although  the  total  note  circula- 
tion was  increased  29  per  cent.,  the  gold  in  the  reserves 

1  At  the  Bank  of  England,  since  1873,  the  rate  has  never  been  higher  than 
6  per  cent,  and  for  only  ninety-six  days  in  all,  divided  between  four  occasions 
(in  1874,  1875,  I878,  and  1882).  At  the  Bank  of  France,  in  the  same  time, 
the  rate  has  never  risen  higher  than  5  per  cent.,  and  for  one  hundred  and 
ninety  days,  divided  between  three  occasions  (in  1874,  1881,  and  1882). 
At  the  Bank  of  Germany,  also,  the  rate  has  never  risen  higher  than  6  per 
cent.,  and  for  one  hundred  and  thirty-seven  days,  divided  between  four 
occasions  (in  1874,  1875,  1876,  and  1882).  See  Report  of  Royal  Commission 
on  Depression  of  Trade,  Appendix,  pp.  370-373. 

2  From  figures  given  by  Soetbeer ,  Materialien,  etc. ,  pp.  58-70.  For  France, 
see  Bulletin  de  Statistique  Comparee,  January,  1887,  pp.  62,  63. 


GOLD   IN  BANK  RESERVES 


65 


1870-1874 

1885 

Reserves 

Total 
note 
circu- 
lation 

Reserves 

Total 
note 
circu- 
lation 

Gold 

Silver 

Gold 

Silver 

Banks  of  the  United 

Kingdom 

Banks  of  Australia. .  . 

Banks  of  Italy 

National      Bank      of 
Belgium 

Bank   of  the  Nether- 
lands   

Bank      of      Austria- 
Hungary 

Imperial   State    Bank 

[i872]$i53,825 
[1874]     41.380 
[1869I   131,800 
[1870]      15,447 

[1870]        4,893 

[1871]        2,109 

[1871]      16,651 

[1871]      80.361 

[1870]        1,749 
[1873]        7,058 

[1872]       3.801 

[1871]      18,900 

$106,600 
33,695 

14,230 

55,320 

37,i6o 

4,775 

4.325 
1,535 

6,980 

• 

$198,540 

20,580 

274,100 

88,487 

40,505 

62,857 

119,000 

429,486 

7,327 
11,794 

16,877 

284,561 

$141,205 

65,890 

231.483 

56,121 

13,900 

19,161 

25,902 

102,207 

3,436 
7,169 

11,566 

158,100 

$217,087 
11,203 

6,540 

38,366 

48,646 

676 

777 

846 

7,900 

$186,850 

28,115 

583.610 

189,690 

73.400 

76,972 

136,351 

429,860 

9,835 
9.287 

18,370 

276,500 

Imperial      Bank      of 
Sweden 

Bank  of  Norway 

National      Bank      of 
Denmark 

National     Banks    of 
the  United  States. . 

Total 

$477,974 

$264,620 

$1,554,114 

$836,140 

$332,041 

$2,018,840 

was  increased  75  per  cent.,  while  the  silver  was  also 
increased  25  per  cent.  In  1870-74,  the  gold  reserves 
amounted  to  28  per  cent,  of  the  total  note  circulation, 
and  constituted  64  per  cent,  of  all  the  specie  reserves. 
In  1885,  the  gold  bore  a  larger  ratio  to  a  larger  issue 
of  paper,  or  41  per  cent,  of  the  total  note  circulation; 
and,  in  spite  of  unusual  accumulations  of  silver  (in  the 
Bank  of  France,  for  example),  the  gold  formed  71  per 
cent,  of  the  specie  reserves.  This  is  a  very  significant 
showing.  What  it  means,  without  a  shadow  of  doubt, 
was  that  the  supply  of  gold  was  so  abundant  that  the 
character  and  safety  of  the  note  circulation  had  been 
improved  in  a  signal  manner.     In  1871-74  there  was 


66  MONEY  AND  PRICES 

$i  of  gold  for  every  $3.60  of  paper  circulation;    in 
1885  there  was  $1  of  gold  for  every  $2.40.  * 

There  are,  moreover,  strong  and  substantial  reasons 
for  believing,  on  independent  grounds,  that  gold  was 
abundant  instead  of  scarce.  When  we  compare  the 
total  production  since  1850  with  that  since  1492,  the 
result  is  very  striking,  and  cannot  be  too  strongly 
emphasized : 


1 493-1 850. 
1851-1885. 


Gold 


$3.3I4iS5o,ooo 

4,452,525,ooo 


Silver 


$7,358,45o,ooo 
2,399,475>ooo 


In  the  thirty-five  years  since  1850,  one  and  one-third 
times  as  much  gold  had  been  produced  as  in  the  three 
hundred  and  fifty-eight  years2  preceding  1850,  while 
only  one-third  as  much  silver  had  been  produced  in 
the  same  time.  And  yet  we  heard  a  great  deal  of  the 
phenomenal  yield  of  the  silver-mines  in  those  years. 
What  has  become  of  this  vast  quantity  of  gold?  We 
are  fairly  obliged  to  explain  why  gold  h.as  not  fallen 
in  value.     It  certainly  would  have  fallen,  had  not  its  use 

1  In  the  face  of  these  facts,  Frewen's  statement  (ibid.,  p.  597)  seems  a 
little  wide  of  the  mark:  "Not  only  does  the  note  currency  diminish  as  the 
gold  represented  by  such  currency  diminishes,  but,  ...  as  gold  becomes 
scarcer  and  prices  tend  to  fall,  so  also  does  the  entire  system  of  credit  con- 
tinue to  contract."  Cernuschi,  the  very  apostle  of  bimetallism,  himself  ad- 
mits that  "  the  fall  in  prices  which  is  complained  of  is  not  due  to  what  has 
been  called  a  scarcity  of  gold — a  scarcity  which  is  purely  imaginary." — Lon- 
don Economist,  April  24,  1886. 

2  The  amount  in  existence  in  1848  is  only  a  matter  of  conjecture.  The 
estimates  vary  from  $1,000,000,000  to  $3,150,000,000. 


ANNUAL   GOLD   PRODUCTION  67 

been  extended;  and,  out  of  the  extraordinary  addi- 
tion to  the  world's  supply,  the  demands  of  France, 
India,  Germany,  Italy,  and  the  United  States  have 
been  easily  met.  The  countries  of  the  world  were 
saturated  with  the  new  gold.1  Mr.  Goschen  spoke  of 
an  addition  to  England's  gold  circulation  in  ten  years 
of  $100,000,000;  while,  strangely  enough,  Mr.  Giffen 
was  alarmed  because  there  was  no  coinage  at  all  in 
1881-82 !  Laveleye,  also,  was  troubled  because  the 
coinage  in  France  was  diminishing ! 

But  we  heard  it  said  constantly  that  the  annual 
production  of  gold  was  falling  off,  and  that  its  value 
must  rise.  Now,  this  is  what  Mr.  S.  Dana  Horton2 
calls  the  "sempiternal  object  of  erroneous  reasoning." 
The  value  of  gold  is  affected  by  the  total  existing  sup- 
ply, which  is  very  large  relatively  to  the  annual  sup- 
ply. And  yet  it  was  true  that  the  annual  production 
had  fallen  off  from  its  highest  point  about  1853.  Be- 
fore 1840,  the  annual  production  of  gold  amounted  to 
about  $14,000,000:  it  rose  as  high  as  $157,000,000;  but 
in  1885  it  was  about  $100,000,000.  A  millionaire, 
however,  does  not  become  poor  because  his  annual  in- 
crease of  wealth  is  a  few  thousands  less  than  it  was  at 

1  Soetbeer  (Materialicn,  p.  70)  gives  the  following  summary  of  the  amount 
of  gold  in  the  civilized  countries  by  years  (in  millions  of  dollars) : 

1877        1878        187Q        1880        1881        1882        1883        1884        1885 
722  712  875  947  g7s         1,017        1,150        1. 170        1,260 

7  Quarterly  Journal  of  Economics,  October,  1885,  p.  58.  Laveleye  and 
Disraeli  are  addicted  to  the  "sempiternal"  fallacy.  (See  Contemporary 
Review,  May,  1886,  p.  623.)  Cernuschi,  however,  remarks,  "The  power  of 
the  gramme  of  gold  is  proportionate  to  the  whole  of  the  gold,  .  .  .  not  to 
the  importance  of  the  annual  production"  (Anatomy  of  Money,  p.  11). 


68 


MONEY  AND  PRICES 


its  greatest:  his  past  accumulations  are  still  his,  and 
his  yearly  income  is  yet  large.  The  yield  from  the 
mines  in  1885  was  enormous  compared  with  any  period 
previous  to  1850,  and  this  had  been  kept  up  for  thirty- 
five  years.  The  longer  this  continues,  the  less  im- 
portant will  be  the  variations  in  the  annual  supply.1 


§  8.  Even  though  the  gold  production  from  1850 
to  1885  had  been  great  enough  to  meet  very  heavy  de- 
mands, yet  it  may  be  asked  how  far  had  the  means  for 
economizing  money  developed  in  that  period.  Mr. 
Giffen  believed  no  evidence  existed  as  to  an  extension 
of  credit  devices  since  1873,  that  England  and  the 
United  States  were  already  fully  "banked"  before 
this  period,  and  that  the  clearing  system  on  the  con- 
tinent showed  no  progress.     The  increase  in  popula- 

1  The  annual  average  production  of  gold  and  silver  after  1850  is  as  follows: 


Periods 

Gold 

Silver 

18^1-'?  ■» 

$139,077,000 
140,7  29,000 
129,081,000 
136,035,000 
121,302,000 
120,261,000 
104,025,000 

$40,096,750 
41,177,250 
49,827,000 
59,924,000 
86,162,000 
95,5i5,Soo 

107,190,000 

1856-60 

1861-65 

1866-70 

187 1-7  <> 

1876-80 

1881-85 

The  yield  for  the  single  years  since  1880  is  as  follows: 


Gold 

Silver 

1881 

$110,810,000 
103,564,000 
100,822,000 
101,940,000 

$98,418,000 
105,916,000 
108,582,000 
110,899,000 

1882 

1883 

1884 

Soetbeer,  Materiolien,  p.  i. 


INCREASE  OF  GOLD 


.69 


tion  and  commodities,  he  urges,  had  not  only  not  been 
compensated  for  by  any  economizing  expedients,  but 
the  increased  demand  for  gold  had  fallen  on  a  dimin- 
ishing supply. 

To  examine,  first,  whether  the  issue  of  notes  has 
saved  the  use  of  gold  in  the  principal  countries  of  the 
world  since  1873,  it  will  be  necessary  to  compare  the 
amounts  of  uncovered  paper,  not  the  amounts  of  the 
total  circulation  in  the  periods  taken.  To  the  extent, 
of  course,  to  which  the  covered  circulation  has  increased, 
no  extension  of  credit  has  taken  place.  For  this  pur- 
pose, I  prepared  a  table  showing  the  amounts  of  the 
total  circulation,  and  the  amounts  of  the  total  circula- 
tion less  the  specie  reserves,  in  the  principal  countries 
for  the  years  1870-74  and  for  1885  (000  omitted): 


Countries 

1870-74 

1885 

Uncovered  by 
specie 

Total  cir- 
culation 

Uncovered 
by  specie 

Total  cir- 
culation 

Great  Britain1 

France* 

[1872]  $44,719 
[1869]      39,739 
[1870]    168,000 
[1873]    209,678 
[1871I   135.750 
[1873]   339,652 
[1871]   505,400 

$216,939 
322,869 
180,000 
263,616 
312,649 

475,357 
505,400 

$45,644 

135,041 

170,000 
188,646 
124,500 
525,000 
172,000 

$211,139 
583,610 
285,200 
263,194 

299.905 
627,000 
814,300 

Italy3 

Austria-Hungary4 . . 
Germany* 

Russia6 

United  States7 

Total 

$1,442,938 

$2,276,830 

$1,360,831 

$3,084,348 

1  Soetbeer,  Materialien,  p.  59,  and  Statistical  Abstract,  1884. 

*The  mean  of  the  highest  and  the  lowest  circulation  is  given  for  1869. 
See  Bulletin  de  Statistique  Comparee,  III,  21,  and  London  Economist,  January 
23  and  December  25,  1869.     For  1885,  see  Soetbeer,  ibid.,  p.  73. 

•  See  Relazione  sulla  Circolazione  Carlacea,  made  to  the  Italian  Chamber 


70  MONEY  AND  PRICES 

From  these  figures,  it  will  be  seen  that  in  1885,  as  com- 
pared with  the  years  about  1873,  the  uncovered  cir- 
culation decreased  by  $82,000,000,  or  5  per  cent.;  while 
the  total  circulation  increased  by  $800,000,000,  or  35 
per  cent.  This  indicates  quite  clearly  the  effects  of 
the  great  addition  to  the  world's  stock  of  gold  and  silver 
since  1873.  Specie  to  the  amount  of  $800,000,000  had 
gone  into  circulation  in  the  form  of  note  issues,  rep- 
resenting an  equivalent  amount  of  specie;  but  gold 
had  not  been  economized  by  the  use  of  credit  in  the 
form  of  notes.  While  the  total  circulation  of  these 
countries  had  increased  35  per  cent.,  the  paper  had 
been  much  better  protected;  for  in  1870-74  the  specie 
was  but  36  per  cent,  of  the  total  issues,  and  in  1885 
the  specie  was  55  per  cent,  of  the  total  issues.  From 
this  table,  then,  we  see  where  the  gold  referred  to  by 
Mr.  Goschen  had  gone.    About  $750,000,000  of  specie, 

of  Deputies,  March  15,  1875,  Appendix,  pp.  20,  41;  and  Haupt,  L'Histoire 
Monitaire  de  notre  Temps,  p.  274. 
*  See  Soetbeer,  ibid.,  pp.  64,  74;  and  Miilinen,  Finances  de  VAutriche,  p. 

163. 

$  For  1871,  the  uncovered  circulation  is  given  by  Soetbeer,  ibid.,  p.  74. 
Taking  the  total  circulation  of  all  the  German  banks  (given  for  1871,  p. 
65),  and  supposing  the  Landes  papier  geld  to  be  the  same  in  1871  as  in  1870, 
I  get  the  total  circulation  for  the  year  187 1  instead  of  1870. 

6  See  Bulletin  de  Statislique  Comparie,  II,  161;  Haupt,  ibid.,  p.  366;  and 
Soetbeer,  ibid.,  pp.  66,  75. 

'For  1871,  from  the  $674,000,000  of  United  States  notes  and  national 
bank  notes  there  has  been  deducted  $168,600,000  for  notes  held  by  the 
treasury  and  the  banks.  No  notes  could  be  presented  for  specie  in  1871. 
For  1885,  from  $664,000,000  of  United  States  notes  and  national  bank 
notes,  $134,800,000  was  deducted  for  notes  held  by  the  treasury  and  the 
banks.  The  amount  of  specie  which  could  be  drawn  on  by  holders  of  either 
kinds  of  notes,  to  the  amount  of  $278,400,000  gold  and  $79,000,000  silver, 
was  also  deducted,  to  ascertain  the  uncovered  note  circulation.  Cf.  Finance 
Report,  1886,  I,  p.  lxxx. 


CHECKS  ECONOMIZE  GOLD  71 

mostly  gold,  had  gone  into  circulation  since  1873,  in 
the  form  of  covered  paper  issues,  in  the  United  States 
and  Italy  alone.  The  paper  currency  of  every  coun- 
try except  Russia  had  gained  in  security,  together  with 
a  large  increase  in  many  of  the  countries.  The  gold 
supplies  had  not  merely  permitted  an  enlarged  note 
circulation,  but  had  furnished  a  much  better  protec- 
tion to  that  increased  issue. 

In  regard  to  the  use  of  checks  and  clearing-houses 
in  economizing  the  use  of  money,  Mr.  Giffen  was 
probably  correct  in  saying  that  this  system  had  at- 
tained its  full  growth  in  the  United  States  and  Great 
Britain  before  1873;  but  an  important  conclusion  is 
to  be  drawn  from  this.  Just  to  the  extent  to  which 
the  system  may  have  been  perfected  is  it  one  which 
expands  with  the  expansion  of  business.  In  the  same 
proportion  that  transactions  increased,  this  means  of 
economizing  the  use  of  money  would  (approximately) 
increase.  The  clearing  system,  in  fact,  is  one  which 
grows  with  the  work  to  be  done.1  Certainly,  this  is 
true  of  wholesale  transactions;    while  in  retail  trade 

1  How  well  this  is  recognized  may  be  seen  by  the  accepted  custom  of 
measuring  the  extent  of  business  by  the  figures  of  the  clearings.  "The  re- 
turns of  the  London  Clearing-House,"  says  Mr.  Palgrave,  "  may  be  regarded 
as  indicating  approximately  the  value  of  the  business  of  the  country  as  in- 
dicated by  price"  {Report  of  Royal  Commission,  Appendix,  p.  330).  In  the 
United  States,  of  all  the  receipts  by  the  i,q66  national  banks  on  one  day  in 
1881,  95  per  cent,  were  made  up  of  forms  of  credit,  exclusive  even  of  cir- 
culating notes;  while  in  New  York  City  this  percentage  was  98.7.  At  all 
the  banks,  only  .65  of  1  per  cent,  of  gold  was  used;  and,  in  New  York  City, 
only  .27  of  1  per  cent,  of  gold  was  used.  See  Report  of  the  Comptroller  of  the 
Currency,  1881,  p.  14.  Cf.  also  Journal  Statistical  Society,  June,  1865, 
"Country  Clearings." 


72  MONEY  AND  PRICES 

the  use  of  checks  is  steadily  widening.  An  elastic  sys- 
tem, so  far  as  it  is  ready  to  perform  exchanges  in  pro- 
portion to  their  increase,  meets  the  need  of  more  money 
the  moment  it  appears.  If  there  has  been  no  increase 
in  clearings  under  such  conditions,  it  only  shows  that 
transactions  have  not  increased,  not  that  there  is  any 
less  efficacy  in  the  system.  Where  checks  are  in  gen- 
eral use  other  forms  of  credit  are  of  less  importance.1 
On  the  Continent  the  borrower  at  a  bank  will,  as  a 
rule,  prefer  notes  instead  of  the  right  to  draw  on  a 
deposit  by  checks.  Yet,  even  at  the  Bank  of  France, 
66  per  cent,  of  the  transactions  in  1877-78  were  effected 
without  the  use  of  notes  and  coin.2  But,  on  the  other 
hand,  the  Chambre  de  Compensation,  established  in 
Paris  in  1872-73  (including  twelve  of  the  large  banks), 
with  the  help  of  the  Bank  of  France,  performed  ex- 
changes3 the  first  year  to  the  value  of  $320,000,000, 
which  in  1883-84  had  risen  only  as  high  as  $843,000,- 
000.  Clearing-houses  were  also  established  in  Aus- 
tria and  Italy  in  1872,  but  they  have  made  little  gain. 
The  exchanges  at  the  Saldirungs-Verein  in  Vienna 
(formed  by  the  four  old  banks  of  the  Saldosaal  of 

1The  use  of  bills  of  exchange  in  Great  Britain  seems  to  be  falling  off, 
with  an  increased  use  of  checks.    Cf.  Sauerbeck,  Prices  of  Commodities,  p.  8. 

*  Cf.  Journal  of  Statistical  Society,  1884,  p.  493.  If  Mulhall's  Dictionary 
of  Statistics  can  be  trusted,  the  banking  of  the  world  since  1840  has  in- 
creased elevenfold — three  times  faster  than  commerce,  and  thirty  times  faster 
than  population.  Leroy-Beaulieu  reports  that  "  checks  have  become  every- 
where a  more  common  instrument  of  payment"  (Revue  des  Deux  Monies, 
May,  1886,  p.  403). 

1  The  figures  for  the  continent  are  taken  from  Rauchberg's  Die  Entwick- 
elung  des  Clearing-Verkehres,  in  the  Bulletin  de  I'Institut  International  de 
Statistique,  I,  p.  140,  etc. 


SHIPMENTS  OF  GOLD  ECONOMIZED        73 

1864,  together  with  ten  other  large  banks)  were  no 
greater  in  1885  than  ^  1872,  being  at  that  time  about 
$200,000,000  a  year.  The  clearings  of  the  Stanze  di 
Compensazione  in  the  several  cities  of  Italy  show  a  gain 
from  $129,000,000  in  1883  to  $348,000,000  in  1885, 
with  some  promise  for  the  future.  But,  in  Germany, 
a  decisive  advance  was  made  in  1883,  under  the  lead- 
ership of  the  Reichsbank,  in  the  establishment  of 
clearing-houses  in  Berlin,  Hamburg,  Frankfort,  Bremen, 
Cologne,  Leipzig,  Stuttgart,  Breslau,  and  Dresden.  In 
the  year  1884,  the  exchanges  amounted  to  the  large 
sum  of  $3,032,000,000.  Although  not  so  large  as  the 
$30,000,000,000  a  year  in  New  York  or  London,  it  is 
a  very  promising  increase  in  the  means  of  economizing 
the  use  of  specie  on  the  Continent. 

In  international  trade,  also,  as  Leroy-Beaulieu1  sug- 
gested, it  is  not  necessary  that  the  precious  metals 
should  increase  as  rapidly  as  commerce  expands.  The 
ocean  and  land  telegraph,  the  shortening  of  routes  by 
canals,  and  the  extraordinary  improvements  in  the 
ocean  steamships  have  resulted  in  economizing  the 
shipments  of  gold  between  different  countries.  A  few 
years  ago,  twelve  or  fifteen  days  were  taken  up  in 
carrying  gold  from  New  York  to  London;  but  later 
six  days  were  sufficient.  Formerly,  gold  was  ninety 
days  coming  from  Australia  to  England;  while  only 
thirty-five  days  were  later   required.     In   this  way, 

1  Revue  des  Deux  Mondes,  May,  1886,  p.  402.  This  is  more  or  less  con- 
firmed by  Bourne's  table  {Journal  of  Statistical  Society,  1879,  P-  411)- 


74  MONEY  AND  PRICES 

gold  being  a  less  time  in  passing  from  person  to  person 
in  international  transactions,  greater  rapidity  of  cir- 
culation is  assured,  with  all  the  effects  of  an  increase 
in  quantity.1  The  use  of  foreign  bills  of  exchange  is 
as  great  as  ever  between  bankers  in  different  countries; 
while  there  is  far  greater  activity  of  late  not  only  in 
the  transmission  of  securities  which  discharge  interna- 
tional liabilities  but  also  in  the  extended  use  of  inter- 
national money-orders.2 

§  9.  To  get  more  light  on  the  question  whether  gold 
has  risen  relatively  to  all  commodities  from  causes 
affecting  gold  itself,  it  would  be  profitable  to  examine 
into  the  movement  of  prices  in  India;3  but  this  cannot 
be  discussed  here. 

It  will  be  as  well  to  close  the  present  study  by  re- 

1  Fowler  (Appreciation  of  Gold,  pp,  12,  13)  says  of  English  trade:  "The 
total  of  our  imports  and  exports  from  1866  to  1875  was  in  round  figures 
£6,000,000,000,  and  the  total  of  bullion  and  specie  imported  and  exported 
was,  in  the  same  period,  £530,000,000;  but  the  total  of  our  imports  and 
exports  from  1876  to  1885  was  £6,700,000,000,  and  this  vast  amount  was 
moved  with  the  aid  of  £493,000,000  of  bullion  and  specie.  If  we  take  the 
gold  alone,  we  used  about  £327,000,000  in  the  former  decade  against  £278,- 
000,000  in  the  latter."  If  we  can  trust  Mulhall,  in  1861-70  the  amount  of 
the  precious  metals  transported  was  12  per  cent,  of  the  sea-borne  commerce 
of  the  world,  while  in  1871-80  it  was  only  8  per  cent. 

2  In  the  countries  composing  the  Postal  Union  in  1885,  the  issue  of  inter- 
national money-orders  had  risen  to  $60,000,000,  and  the  issue  of  domestic 
money-orders  to  the  surprising  amount  of  $1,821,000,000.  See  Statistique 
Generate  du  Service  Postal,  Berne,  1886.  In  the  United  States  alone  domestic 
money-orders  have  increased  $80,000,000  since  1873.  I  am  much  indebted 
for  information  to  Mr.  C.  F.  Macdonald,  of  the  Post  Office  Department. 

3  These  prices,  so  far  as  then  published,  can  be  found  in  Barbour's  Theory 
of  Bimetallism;  in  J.  E.  O'Conor's  Report  on  Prices  and  Wages  in  India, 
1886,  Government  of  India,  Department  of  Finance  and  Commerce;  and 
in  the  Report  of  the  Royal  Commission  on  Depression  of  Trade,  Appendix, 
PP.  331-342,  378-382. 


RENTS,  PROFITS,  AND  WAGES  75 

f erring  briefly  to  the  argument  of  the  English  writers,1 
that  a  scarcity  of  gold  had  brought  about  a  fall  in 
rents,  profits,  and  wages.  It  will  be  recalled  at  once, 
in  regard  to  rents,  that  a  marked  characteristic  of  the 
period  since  1873  had  been  the  opening  up  of  new  and 
fertile  lands,  whose  products  have  been  transported 
at  a  greatly  diminished  rate.  But  this  in  itself  is  a 
reason  why  lands  in  the  older  countries  should  be 
thrown  out  of  cultivation,  and  why  rents  should  be 
lowered.  This  phenomenon,  then,  can  be  accounted 
for  on  other  grounds  than  the  scarcity  of  gold. 

In  attributing  the  fall  in  the  rate  of  profits  to  the 
general  fall  of  prices  (due  to  a  single  cause,  the  scarcity 
of  gold),  these  writers  fall  into  an  error  which  has  been 
already  thoroughly  exposed  by  Mr.  Mill,2  who  pointed 
out  that  "the  fall  of  price,  which  if  confined  to  one 
commodity  really  does  lower  the  profits  of  the  pro- 
ducer, ceases  to  have  that  effect  as  soon  as  it  extends 
to  all  commodities."  In  some  industries,  however, 
owing  to  changes  in  relative  demand  and  supply,  in- 
tense competition  had  set  in  after  1873,  and  producers 
had  necessarily  submitted  to  lowered  profits.  But,  in 
so  far  as  prices  had  fallen  in  all  industries  alike,  that 
cannot  have  been  the  cause  of  a  general  fall  of  profits. 

If,  however,  labor  has  not  fallen  in  price,  while  other 
things  have  fallen,  "what  has  really  taken  place,"  says 

1  Frewen,  ibid.,  p.  599;  Giffen,  Journal  of  Statistical  Society,  1879,  p.  57, 
and  Contemporary  Review,  June,  1885,  p.  816;  the  writer  in  the  Edinburgh 
Review,  July,  1886,  p.  39;  and  Sauerbeck,  ibid.,  p.  42. 

2  Principles  of  Political  Economy,  book  IV,  chap.  IV,  §  1. 


76  MONEY  AND  PRICES 

Mr.  Mill,  in  the  connection  already  quoted,  "is  a  rise 
of  wages;  and  it  is  that,  and  not  the  fall  of  prices, 
which  has  lowered  the  profits  of  capital."  It  is  quite 
certain  that  there  had  been  no  fall  of  real  wages  after 
1873,  while  there  is  good  reason  to  suppose  that  they 
had  risen.1  In  the  United  States,  money  wages  may 
have  fallen  slightly  -in  some  industries;  but  an  allow- 
ance must  be  made  for  the  depreciation  of  paper  pre- 
vious to  1879.  American  producers  had  been  enabled 
to  sell  at  lower  prices,  and  yet  pay  relatively  higher 
wages,  only  by  a  gain  in  efficiency.  As  a  typical  case, 
the  accompanying  facts  were  furnished  me  by  a  manu- 
facturer from  his  own  books: 


Average  wages  per  day 

Amount  paid  for  a  given 
piece  of  work 

December,  1867 
1876 
1886 

$2.05 
1.71 
1.79 

$1.00 
.78K 
•37^ 

For  Germany,  Soetbeer  gives  a  variety  of  evidence 
to  show  the  rise  of  wages2  since  1873.  Money  wages 
in  Italy,3  which  were  indicated  by  the  number  179  in 
1873,  were  m  l884  expressed  by  222.  But  it  is  not 
necessary  to  cite  further  evidence  on  this  point.  The 
fact  that  wages  have  risen  tends  to  confirm  the  belief 
that  the  fall  of  prices  was  due  chiefly  to  the  introduc- 
tion of  improvements. 

1  See  Report  of  Massachuestts  Bureau  of  Labor  Statistics  for  1884,  and  Re- 
port on  the  Statistics  of  Wages,  United  States  Census,  1880,  vol.  XX. 

2  Materialmen,  pp.  88,  90,  91. 

8  See  Movimento  dei  Prezzi  di  Alcuni  Generi  Alimentari  dal  1862  0/  1885 
(1886),  issued  by  the  Italian  Department  of  Agriculture,  p.  xxvii. 


PAYMENT  FOR  CONTRACTS  77 

§  10.  In  the  study  of  this  subject,  we  have  been 
confronted  at  the  outset  with  a  fall  of  prices  after  1873 
which  happened  to  coincide  with  the  demonetization 
of  silver  by  Germany  and  the  United  States,  and  the 
beginning  of  a  new  epoch  in  the  production  of  many 
commodities.  To  assume  that  because  the  fall  of 
prices  coincided  with  the  demonetization  of  silver  it 
was  due  to  an  appreciation  of  gold,  without  consider- 
ing whether  the  coincident  phenomena  were  traceable 
to  entirely  distinct  causes,  is  to  fall  into  the  fallacy  of 
post  hoc  propter  hoc.  The  forces  which  fix  the  level  of 
prices  at  any  time,  moreover,  are  far  too  complex  to 
admit  of  the  inference  that,  because  prices  have  fallen 
seriously,  gold  has  become  scarce.  On  the  other  hand, 
all  the  phenomena  presented  to  show  the  scarcity  of 
gold  are  explicable  on  other  grounds. 

But — what  is  of  very  grave  importance — we  must 
admit  that  great  changes  in  prices  may  take  place 
irrespective  of  the  scarcity  or  abundance  of  the  precious 
metals.  From  this  it  follows  that,  as  a  standard  of 
payment  for  contracts,  neither  gold  nor  silver,  nor  even 
gold  and  silver  (if  they  should  ever  be  firmly  yoked 
together  by  international  bimetallism),  will  change  so 
as  to  correspond  to  the  changes  in  prices  brought 
about  by  a  variety  of  causes  independent  of  the  quan- 
tity of  the  precious  metals.  Under  such  circumstances, 
the  attention  given  to  the  question  of  a  proper  stand- 
ard of  deferred  payments  can  never  be  too  careful. 


CHAPTER  III 
CHANGES  IN  PRICES  SINCE   1896 

§  i.  In  the  last  chapter  attention  was  given  to  the 
reasons  lying  behind  the  decline  of  prices  after  1873. 
This  decline  continued  beyond  1885,  and  reached  its 
lowest  point  about  1896.  In  this  whole  period  it  was 
a  problem  of  falling  prices  and  of  explaining  the  causes 
then  at  work.  A  very  different  task  now  lies  before 
us  in  the  period  since  1896.  Here  we  have  to  do 
with  rising  prices.  There  is  thus  an  opportunity  and 
a  duty  to  analyze  the  causes  affecting  prices  in  general, 
and  to  ascertain  why  in  the  early  period  prices  fell, 
while  in  the  later  period  they  rose.  Such  a  problem 
is  certain  to  put  the  theories  of  price  to  a  practical  test. 

In  order  to  place  before  us  clearly  and  briefly  the 
various  elements  in  what  is  a  large  question,  it  seems 
best  to  present  an  analysis  in  topical  form  of  these 
elements  which  influence  prices  not  only  in  a  time  of 
falling,  but  of  rising  prices,  as  follows: 

Part  I.    Prices  of  Commodities 

a.  Facts:  Movement  of  Prices,  1890-1915 

b.  Causes  of  the  Changes  in  Prices  of  Commodities: 
1)  The  Increased  Production  of  Gold: 

f  1.  Gold 


(1)  Money  in 

Circula-1  2.  Other  Forms 
tion  of  Money 

78 


1.  U.  S.  Notes 

2.  Bank-Notes 

3.  Silver  Certificates 

4.  Silver  Coin 

5.  Checks 


ELEMENTS  INFLUENCING  PRICES  79 

1.  Gold 


(2)  Bank  Re- . 

2.  Other  Law- 
ful Money 


serves 


i.U.  S.  Notes 

2.  Silver  Certificates 

3.  Silver  Coin 
(3)  Credit  and  Prices 

2)  Changes  in  Expenses  of  Production  of  Goods 

(1)  Tariffs  and  Taxation 

(2)  Wages,  Unionism 

3)  Agricultural  Conditions 

Food,  Cotton,  etc. 

4)  Monopolies,  "Trusts" 

5)  General  Extravagance 

6)  Speculation 

Part  II.    Prices  of  Securities 

a.  Facts:  (1)  Prices  of  Railway  and  Industrial  Securities 

(2)  Specie  Reserves 

(3)  International  Movement  of  Gold 

(4)  Ratio  of  Loans  to  Deposits 

b.  Causes  of  the  Changes  in  Prices  of  Securities 

1)  Fall  in  the  Value  of  Gold 

The  Volume  of  Circulation 

2)  Earnings 

3)  Speculation 

Expanded  Credit 

4)  Overissues 

At  the  beginning,  certain  ambiguities  as  to  what  is 
to  be  included  in  our  present  examination  should  be 
cleared  up.  Obviously  we  must  include  in  a  complete 
study  not  only  the  changes  in  the  prices  of  goods  but 
those  in  the  prices  of  securities.  Therefore,  as  indi- 
cated in  the  outline  above,  our  discussion  should  break 
into  two  parts,  one  treating  of  the  prices  of  commodi- 
ties, and  the  other  of  the  prices  of  securities.    Although, 


So  MONEY  AND  PRICES 

in  the  past,  the  causes  of  changes  in  the  prices  of  goods 
and  securities  have  been  often  assumed  to  be  the  same, 
a  very  casual  reflection  will  show  that  they  are  widely 
different,  as  may  be  noted  by  the  causes  briefly  pre- 
sented in  the  outline.  A  full  presentation  of  all  the 
points  raised  by  this  outline  would  fill  many  volumes,1 
therefore,  while  the  outline  may  serve  as  a  map  of 
the  field,  and  of  the  relations  of  one  point  to  another, 
it  will  also  serve  as  a  means  of  indicating  the  topics 
which  must  here  be  passed  over,  and  those  which  have 
been  chosen  for  examination.  It  is  intended  here  to 
present  a  study  only  on  changes  in  the  prices  of  com- 
modities; and  in  this  chapter,  also,  it  is  the  purpose 
to  treat  mainly  of  the  effect  of  gold  on  the  general  level 
of  prices,  namely : 

Part  I,  b,  i).    The  Increased  Production  of  Gold 

i.  The  Supply  of  Gold 

Table  of  Production,  1 890-191 5 

2.  The  New  Demand  for  Gold,  1890-1915 

3.  Effect  of  Gold  on  Prices,  1890-1915 

(1)  In  Circulation  as  a  Medium  of  Exchange 

(2)  In  Bank  Reserves 

(3)  In  Expansion  of  Credit 

After  having  examined  into  the  relation  of  gold  to 
prices,  some  attention  can  then  be  given  to  the  effect 
of  changes  in  expenses  of  producing  goods  upon  prices 
(e.  g.,  Part  I,  2). 

1  In  later  volumes,  for  which  these  collected  articles  are  only  preliminary 
studies,  it  is  hoped  to  give  a  full  and  systematic  discussion  of  all  the  prob- 
lems here  raised.  In  a  series  of  volumes  on  money  only  that  on  The  Prin- 
ciples of  Money  (1903)  has  yet  been  prepared. 


A  SUMMARY  OF  PRICE  THEORY  81 

§  2.  The  other  topics  under  Part  I,  not  given  de- 
tailed treatment,  may  be  covered  in  the  form  of  proposi- 
tions without  argument.  At  the  risk  of  possible  repe- 
tition, we  may  thus  present  a  summary  of  the  forces 
determining  prices  in  general  statements: 

i.  The  price  of  a  commodity  is  measured  by  the 
quantity  of  a  given  standard  for  which  it  will  exchange. 

2.  A  change  of  prices  may  be  due  to  changes  in  the 
conditions  affecting  the  supply  (thus  including  ex- 
penses of  production)  of  goods,  as  well  as  to  changes 
in  the  demand  for  and  supply  of  gold.  A  statistical 
statement  of  a  change  of  price  is  not  a  statement  of 
the  cause  of  the  change. 

3.  Probably  there  is  not  so  much  difference  of  opin- 
ion regarding  the  theory  of  prices  as  is  sometimes 
supposed.  Other  causes  being  supposed  constant,  an 
increased  supply  of  gold  would  tend  to  raise  prices. 
No  one  can  fail  to  see  that,  if  by  "money"  is  meant 
gold,  a  change  in  its  quantity  would,  other  things 
being  equal,  be  a  factor  affecting  prices.  An  increas- 
ing demand  for  gold,  however,  would  work  against  the 
effect  of  an  increasing  supply.  If  the  new  demand 
offset  the  new  supply,  then,  if  changes  of  prices  oc- 
curred, their  cause  must  be  sought  in  the  influences 
touching  the  producing  and  marketing  of  goods. 

4.  The  effective  demand  for  goods  (granting  their 
utility)  is  limited  by  the  buyer's  purchasing  power. 
This  purchasing  power  is  not  identical  with  the  quan- 
tity of  the  media  of  exchange  in  circulation,  any  more 


82  MONEY  AND  PRICES 

than  the  value  of  the  total  exchangeable  wealth  of 
the  community  is  identical  with  the  value  of  the  total 
money  in  circulation.  In  any  event,  demand  alone 
does  not  determine  price. 

5.  The  general  level  of  prices  is  not  independent  of 
particular  prices;  since  there  can  be  no  such  thing  as 
a  general  level,  or  average,  of  prices  which  is  not  the 
resultant  of  a  number  of  particular  prices  each  arrived 
at  by  individual  buyers  and  sellers.  The  causes  of 
price  changes  must  be  sought  in  the  forces  settling 
particular  prices.  This  does  not  exclude  the  con- 
sideration of  any  causes  affecting  the  value  of  the 
standard  in  which  the  prices  of  goods  are  expressed, 
because  the  standard  is  itself  a  particular  commodity. 

6.  In  particular  cases,  competitive  prices  in  this 
country  are  arrived  at  by  the  higgling  of  the  market, 
which  depends  on  buyers'  and  sellers'  judgment  of  the 
demand  and  supply  of  the  commodity  (e.g.,  wheat); 
and,  when  the  price  is  fixed,  the  credit  medium  by 
which  the  commodity  is  passed  from  seller  to  buyer 
comes  easily  and  naturally  into  existence  and,  of  course, 
for  a  sum  exactly  equalling  the  price  agreed  upon, 
multiplied  by  the  number  of  units  of  goods.  Price- 
making  generally  precedes  the  demand  upon  the  media 
of  exchange,  and  does  not  at  all  imply  any  necessary 
demand  at  the  moment  upon  the  standard  in  which 
the  prices  are  expressed  (cf.  infra,  10). 

7.  The  offer  of  "money"  for  goods  is  only  a  resultant 
of  price-making  forces  previously  at  work,  and  does  not 
measure  the  demand  for  goods  (cf.  supra,  6).     That  is, 


LOANS  RELATED  TO  EXCHANGES  OF  GOODS    83 

the  quantity  of  the  actual  media  of  exchange  thus 
brought  into  use  is  a  result  and  not  a  cause  of  the 
price-making  process.  The  supposed  offer  of  money 
has  no  money  as  its  basis,  but  is  only  the  offer  of  a 
purchasing  power,  previously  existing,  based  on  sala- 
ble goods,  which  at  the  moment  of  payment  appears 
expressed  in  terms  of  the  standard.  By  credit  devices 
the  actual  transfer  of  the  standard  is  reduced  to  an 
inconsiderable  minimum.  In  reality  (as  in  foreign 
trade)  goods  are  exchanged  against  goods. 

8.  The  effect  of  credit  on  prices  is  to  be  traced  mainly 
through  banking  facilities  by  which  goods  are  coined 
into  means  of  payment,  so  that,  expressed  in  terms  of 
the  standard  gold,  they  may  be  exchanged  against  each 
other.  Thus  credit  devices  relieve  the  standard  to  an 
incredibly  great  degree  from  the  demand  for  the  use 
of  gold  as  a  medium  of  exchange,  and  thus  remove  a 
demand,  as  trade  increases,  which  would  otherwise  have 
enormously  affected  the  value  of  gold.  Thus  the  effect 
of  credit  on  the  general  level  of  prices  in  considerable 
periods  of  time  is  shown  by  a  tendency  to  reduce  the 
demand  on  the  standard  gold,  and  hence  to  prevent 
the  tendency  toward  falling  prices. 

9.  A  general  proposition  is  that  banks  are  limited  in 
making  loans  by  the  quantity  of  their  capital,  a  bank 
of  large  capital  and  deposits  being  able  to  make  large 
loans,  a  bank  of  small  capital  and  deposits,  small  loans. 
A  second  proposition  is  that  the  demand  for  legitimate 
loans  varies  with  the  exchanges  of  goods  and  collateral 
and  the  opportunities  for  investment.     With  an  in- 


84  MONEY  AND  PRICES 

creasing  activity  in  business,  however — either  sound 
or  speculative — the  expansion  of  loans  is  limited  by 
the  resources  of  the  bank.  Next,  a  bank  trying  to 
carry  a  certain  amount  of  loans,  must  hold  a  specified 
proportion  of  reserves  to  demand  liabilities  under  the 
rule  of  banking  experience  or  law.  The  amount  of  its 
capital  and  the  funds  left  with  it  determine  the  rela- 
tive size  of  its  loan  item;  and  the  extent  of  its  loans  and 
resultant  deposits  determine  the  amount  of  its  reserves. 
The  reserves  of  a  bank  are  thus  a  consequence  of  the 
loan  operations.  This  conclusion,  however,  as  it  af- 
fects the  practical  problem  of  the  present  day,  is  not, 
in  my  opinion,  invalidated  by  the  conceivable  cases 
arising,  when  business  tends  to  outrun  banking  facili- 
ties, in  which  anything  that  makes  increasing  reserves 
possible  would  increase  the  power  of  the  banks  to 
lend.  When  gold  becomes  increasingly  abundant,  the 
banks  having  large  resources  get  more  easily  the  gold 
reserves  needed  for  their  operations.  It  still  remains 
true  that  the  fact  of  an  increased  supply  of  gold  does 
not  of  itself  increase  loans,  unless  conditions  of  busi- 
ness demand  an  increase  in  loans.  Therefore,  the  ex- 
pansion of  business  is  not  a  necessary  consequence  of 
an  increasing  supply  of  gold,  any  more  than  an  ex- 
pansion of  railway  traffic  is  the  necessary  consequence 
of  an  increasing  supply  of  cars.  If  increasing  goods 
are  in  existence  to  be  transported,  then,  of  course,  there 
is  an  increasing  demand  for  cars.  Likewise,  if  there 
are  more  transactions  in  goods,  there  are  more  loans, 


WORLD  MOVEMENT  OF  PRICES,  1850  TO  1915     85 

and  there  is  an  increasing  demand  for  that  which  is 
lawful  reserve.  From  which  it  results  that  the  use  of 
new  gold  in  bank  reserves,  under  present  conditions,  is 
not  the  significant  causal  force  which  expands  business 
and  raises  prices  (although  it  may  be  contemporary 
with  it). 

10.  The  problem  of  explaining  the  general  level  of 
prices  is  one  of  arriving  at  the  adjustment  between 
two  terms  of  a  ratio  (the  standard  on  the  one  side,  and 
goods  on  the  other),  each  of  which  is  influenced  by 
supply  and  demand.  Gold  being  one,  and  goods  being 
many,  a  cause  working  on  gold  alone,  and  important 
enough  to  show  an  appreciable  effect,  might  explain  a 
general  movement  of  prices.  In  practical  operation, 
however,  because  of  the  large  existing  stock  of  gold, 
very  considerable  additions  may  take  place  in  the 
supply  of  gold  without  materially  changing  the  world 
value  of  gold  as  related  to  goods  in  general.  Rapid 
changes  of  prices  are  hence  more  likely  to  be  due  to 
influences  in  the  market  for  goods,  to  changes  in  ex- 
penses of  production,  to  speculative  changes  of  demand 
for  goods,  or  to  psychological  forces  working  inde- 
pendently of  facts. 

§  3.  Before  proceeding  to  an  analysis  of  causes,  it 
is  well  to  have  before  us  the  world  movement  of  prices 
from  1850  to  1915,  as  well  as  the  world  production  of 
gold  by  periods  in  the  corresponding  years.1     Both  are 

1  This  chapter  is  a  combination  of  an  address  delivered  before  the  Ameri- 
can Economic  Association  at  St.  Louis,  in  December,  19 10,  and  an  address 


86  MONEY  AND  PRICES 

presented  together  in  Chart  III,  so  that  direct  com- 
parisons between  the  two  are  made  possible. 

The  prices  for  the  United  States  are  taken  from  the 
Falkner  table  of  the  Aldrich  Report  from  1850  to  1892, 
to  which  are  added  the  index  numbers  of  the  Bureau 
of  Labor,  reduced  to  the  scale  of  the  Falkner  table 
in  1892.  Since  the  currency  prices  from  1862  to  1878 
have  been  reduced  to  a  gold  basis,  by  using  the  premium 
on  gold  as  a  means  of  changing  paper  to  gold  prices,  it 
is  obvious  that  the  line  of  gold  prices  in  those  years 
would  not  be  the  same  as  if  we  had  then  had  a  gold 
standard.  The  sharp  fluctuations  during  the  Civil 
War,  as  shown  in  the  chart,  are  not  to  be  taken  as 
normal.  The  corrective  is  to  be  had  in  the  lines  of 
British  and  German  prices.  Also,  while  the  American 
index  numbers  since  1891  have  been  computed  on  a 
different  base,  and  on  quotations  not  the  same  in  num- 
ber and  articles  as  in  the  Falkner  table,  yet,  as  experi- 
ence has  shown,  the  relative  change  of  level  as  com- 
pared with  the  past  is  safely  indicated  by  the  decline 
shown  in  the  solid  line  in  the  chart  after  1891.  The 
combined  result  of  the  English,1  German,2  and  Ameri- 


before  the  Pan-American  Scientific  Congress  at  Santiago,  Chili,  in  January, 
1909,  edited  so  that  the  statistics  of  gold  and  prices  have  been  brought 
down  to  1915. 

1  Sauerbeck's  figures,  as  continued  by  Sir  George  Paish  in  the  Statist,  are 
used  as  the  only  continuous  table  available,  in  spite  of  objections  to  the 
narrow  range  of  articles  quoted.  The  base,  being  different  from  that  of 
the  American  table,  ioo  is  placed  at  115  on  the  chart,  bringing  a  fair  equality 
of  starting-points. 

2  The  German  index  numbers  are  those  of  Otto  Schmitz,  given  by  W.  C. 


1493-1915 
$16,163  M 


150 


125 


100 

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15  YEARS 

1901-1915 

$6,077  M 


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CHART    III 

1850-1915 

1493-1915 
$16,163   M 

1493-1900 
$10,085  M 

1493-1875 
$6,332  M 

TOTALS 

1493-1850 
$3,158  M 

50  YEARS 

1851-1900 
$6,927  M 

15  YEARS 
1901-1915 
16,077  M 

25   YEARS 

1876-1900 
S3, 753   M 

NEW  GOLD 

25    YEARS 
1851-1875 
$3,174  M 

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- 

WORLD  PRODUCTION  OF  GOLD  87 

can  figures  seems  to  point  clearly  to  a  steady  decline 
from  1873  to  1896;  to  a  slow  rise,  since  1896,  to  a  level 
not  far  different  from  that  of  1850-60.  The  whole 
line  since  1850  and  down  to  191 5  is  used  in  order  to 
provide  the  historical  means  of  comparing  causes  and 
effects  for  the  same  forces  working  both  in  periods  of 
falling  and  rising  prices. 

Since  the  claim  has  been  vigorously  supported,  at 
once  in  the  earlier  and  the  later  periods,  that  prices 
have  been  directly  affected  by  the  supply  of  gold,  on 
Chart  III  are  placed  areas  to  represent  graphically  the 
relative  amounts  of  new  gold  produced  during  the 
periods  in  question,  as  well  as  the  total  stocks  of  gold 
produced  by  the  end  of  these  periods.  The  produc- 
tion of  gold1  may  be  summarized  as  follows: 


PRODUCTION  OF  GOLD  BY  VALUE 

Period  Amount 

1493-1850 $3,158,210,280 

1851-1875 3,174,005,000 

1493-1875 6,332,215,280 

1876-1895 2,467,266,800 

1896-1900 1,286,505,400 

1876-1900 3,753,772.200 

1851-1900 6,927,777,200 

1493-1900 10,085,987,480 

1901-1915 6,077,903,974 

1851-1915 13,005,681,174 

1493-1915 16,163,891,454 

Mitchell,  in  the  Bulletin  of  the  Bureau  of  Labor  Statistics,  No.  173,  p.  249. 
As  the  base  is  very  near  that  of  the  American  table,  the  same  starting-point 
of  100  is  used  for  both  on  the  chart. 

1  A  careful  summary  of  the  annual  world  production  of  gold  and  silver 
in  brief  form,  from  1493  to  1905,  was  printed  by  J.  D.  Magee  in  the  Journal 


88  MONEY  AND  PRICES 

The  simple  statistics  of  production,  however,  do  not 
give  us  a  statement  of  the  actual  stock  of  gold  in  the 
world  at  a  given  date,  since  allowance  must  be  made 
for  the  steady  losses  of  gold  by  abrasion,  shipwreck, 
and  especially  in  the  arts.  It  is  not  easy  to  arrive  at 
a  definite  sum  for  consumption  in  the  arts.  There  are 
only  rough  estimates,  which  should  be  taken  with 
much  hesitation.  With  this  understanding,  some  gen- 
eral idea,  even  though  only  approximate  to  the  truth, 
may  be  reached  as  to  the  existing  stock  at  certain 
dates,  the  ratio  of  the  new  production  to  the  stock  at 
those  dates,  and  thus  the  probable  supply  of  gold  at 
the  present  day. 

The  available  stock  in  1850,  after  the  losses  and 
consumption  from  1492  to  1850,  could  probably  not 
have  been  more  than  $2,ooo,ooo,ooo.1  In  the  period 
of  1851-75  the  consumption  in  the  arts  could  not 
have  been  on  the  average  more  than  $50,000,000 
annually;  in  the  period  of  increasing  extravagance 
during  1876-1900  we  may  estimate  the  annual  con- 
sumption at  not  less  than  $75,000,000;  while,  since 
1900  it  may  have  been  greater,  perhaps,  at  least  $100,- 
ooo,ooo.2  On  the  basis  of  these  estimates  we  may 
formulate  the  general  results  as  follows  (in  millions  of 
dollars) : 

of  Political  Economy,  January,  1910.  These  are  brought  down  to  1915 
from  the  Reports  of  the  U.  S.  Mint. 

1  There  is  a  possible  error  here  of  perhaps  $500,000,000. 

8  The  estimate  of  the  director  of  the  U.  S.  Mint  for  1908  is  $113,996,000 
(cf.  Report  of  1909,  p.  80).  Soetbeer's  estimate  for  earlier  years  was  about 
$60,000,000. 


GOLD  STOCK  AT  CERTAIN  DATES 


89 


Years 


1850 

1851-75.. 

I87S 

1876-1900 

1900 

1901-15. . 

1915 


New  gold 


Lost  in  the 
arts,  etc. 


5,174 


3,753 


6,077 


Si, 250 
(25  years) 

i,875 
(25  years) 

i,5°° 
(15  years) 


Net  addi- 
tion to  the 
stock 


$1,924 
'1,878 

4,577 


Existing 

stock  at 

certain 

dates 


>2,ooo 


3,924 


5,8o2 


10,379 


Percentage 

of  new  gold 

to  existing 

stock 


158 


95 


104 


Thus  it  is  supposed  that  out  of  a  total  production 
from  1492  to  191 5  of  $16,163,000,000,  some  $5,784,- 
000,000  have  disappeared.  In  my  judgment  this  loss 
is  quite  too  large;  and  it  is  quite  likely  that  the  exist- 
ing stock  in  1915  is  much  greater  than  $10,379,000,000. 
The  above  estimates,  however,  are  given  for  what  they 
are  worth.  At  least  they  throw  some  light  on  the 
supply  of  gold. 

It  is  to  be  noticed  that  in  the  latest  period  (1901- 
15)  of  rising  prices  the  percentage  of  new  gold  to 
existing  stock  is  not  very  much  larger  than  in  the 
previous  period  (1876-1900)  of  falling  prices. 

§  4.  In  the  problem  of  discovering  the  causes  of 
changes  in  the  level  of  prices,  it  is  necessary  first  to 
reach  a  conclusion  as  to  those  causes  which  operate 
on  the  gold  standard  in  which  our  prices  are  expressed. 
By  so  doing  we  may  locate  the  general  level — so  far 
as  the  standard  is  concerned — or  the  one  thing  which 


9o  MONEY  AND  PRICES 

might  work  as  a  cause  common  to  all  goods.    The  re- 
lation between  gold  and  goods  might  be  illustrated  by 
the  familiar  mechanical  illustration:    a  rod  balanced 
on  a  fulcrum,  on  one  end  of  which  work  the  forces 
affecting  the  value  of  gold,  and  on  the  other  end  the 
forces  affecting  the  value  of  particular  goods.    The 
relation  between  goods  and  gold  being  a  ratio,  as  one 
end  of  the  rod  goes  up,  the  other  necessarily  goes  down. 
There  are,  as  we  all  know,  various  forces  at  work 
to  produce  the  resultant  price  level.     We  may  here 
start  from  a  proposition  on  which  we  can  all  agree. 
An  increase  in  the  quantity  of  the  monetary  standard 
in  the  world— such  as  gold— would  tend,  other  things 
being  equal,  to  lower  its  value  and  thus  raise  prices. 
In  trying  to  find  the  causes  in  the  price  level  at  any 
given  time  (as  in  1896-1915)  it  is  necessary,  therefore, 
after  having  stated  the  facts  as  to  the  increase  of  gold, 
to  examine  also  into  the  influence  of  "the  other  things." 
To  begin,  we  may  take  up  the  demand  for  gold, 
which,  of  course,  is  both  monetary  and  non-monetary. 
As  to  the  non-monetary  demand  we  have  already 
furnished  the  data.    The  monetary  demand  should 
now  be  taken  up.    It  will  be  found  that  it  has  cer- 
tain definite  characteristics.    Whether  it  be  prejudice, 
or  enlightened  business  judgment,  the  commercial  na- 
tions of  the  world  have  shown  a  persistent  and  con- 
tinuing disposition  to  adopt  a  gold  monetary  system 
as  soon  as  their  own  means,  or  the  forthcoming  supply 
of  gold,  has  made  it  possible.    The  United  States  led 


DEMAND  FOR   GOLD  91 

in  1853,  when  we  declined  to  change  the  ratio  in  order 
to  bring  silver  into  circulation  when  only  gold  was  in 
use.  Beginning  in  1871-73,  Germany,  and  later  the 
countries  of  the  Latin  Union,  Austria-Hungary,  the 
United  States  (with  the  resumption  in  gold  in  1879), 
and  India  (in  1893),  in  response  to  the  preferences  of 
the  commercial  world,  placed  themselves  on  the  gold 
standard  by  legal  enactments.  The  demand  for  gold 
all  through  this  period  was  based  upon  considerations 
independent  of  the  movement  of  prices.  For  this  was 
a  time  of  falling  prices  when  much  was  heard  of  the 
appreciation  of  gold  and  the  need  of  silver.  In  spite 
of  this  tendency  toward  falling  prices,  the  movement 
in  favor  of  the  adoption  of  gold  went  on.  Moreover, 
as  may  be  seen  by  Chart  III,  the  oncoming  supply  of 
gold  in  the  earlier  period  (1851-75)  was  very  large 
in  comparison  with  the  existing  stock  (the  percentage 
being  158  as  compared  with  104  in  the  period  of  1901- 
15).  But  it  was  precisely  this  large  new  supply  of 
gold  which  enabled  the  commercial  nations  to  gratify 
their  desire  for  what  they  believed  was  a  more  stable 
standard.  That  is,  the  demand  increased  pro  tanto 
with  the  supply. 

As  we  enter  the  later  period  (1896-1915)  we  find  this 
momentum  toward  the  gold  standard  still  in  force; 
and  other  countries  in  emulation  planned  to  put  them- 
selves on  an  equally  stable  standard  with  those  whose 
means  had  permitted  an  earlier  action — quite  irrespec- 
tive of  the  fact  that  this  last  was  a  period  of  rising 


92  MONEY  AND  PRICES 

prices,  while  the  former  was  one  of  falling  prices.    In 
this  period,  Russia,  Japan,  various  states  in  South 
America,  such  as  Peru,  Argentina,  and  Brazil,  and 
more  recently  Mexico,  have  emphasized  the  movement 
away  from  silver  to  gold.    Moreover,  as  backward 
lands,  like  Turkey,  parts  of  Asia,  Egypt,  and  various 
districts  of  Africa,  have  developed  their  resources  and 
increased  their  trade,  they  have  taken  on  gold  in  their 
monetary  systems.    With  increasing  trade  also  there 
are  more  exchanges  of  goods;  hence,  even  in  countries 
(like  Great  Britain  and  the  United  States)  that  do  not 
use  gold  to  speak  of,  except  in  reserves,  there  are  in- 
creasing loans  and  deposits  and  thus  somewhat  of  a 
demand    for   more   gold  in  banking  reserves.     Con- 
sequently, in  countries  long  established  on  the  gold 
standard  there  will  be  a  steadily  increasing  demand 
for  gold  as  exchanges  expand.    We  find  this  to  be  a 
special  characteristic  of  the  demand  for  gold   (cer- 
tainly not  existing  in  the  demand  for  silver).    The 
power  of  developing  countries  to  soak  up  new  gold  is 
as  marked  a  part  of  present  conditions  as  is  the  power 
of  a  porous  and  sandy  soil  to  soak  up  a  heavy  rainfall. 
We  must,  therefore,  take  full  account  of  the  noticeable 
fact  that  the  recent  demand  for  gold  seems  about  to 
keep  pace  with  the  new  supply;    that  a  shipment  of 
gold  from  the  mines  to  London  is  to-day  eagerly  com- 
peted for,  not  only  by  European  countries,  but  by 
Egypt,  India,  Turkey,  Argentina,  and  Brazil. 
It  appears  that  from  1896  to  191 5  the  monetary  use 


RECENT  MONETARY   DEMAND   FOR   GOLD     93 

of  gold  has  increased  by  over  $4,000,000,000;  while 
that  of  silver  has  decreased  by  about  $1, 800,000,000.* 
Seven-eighths  of  this  total  of  gold  was  in  banks  or 
public  treasuries. 

The  countries  which  have  been  taking  on  gold  most 
extensively  are  as  follows  (in  millions) : 


United  States 

Russia 

Germany 

South  American  States 

United  Kingdom 

Austria-Hungary 

Italy 

Japan  


1896 

1915 

Increase 

$672 

$2,299 

$1,627 

488 

1,058 

S7° 

675 

7i4 

41 

40 

3i3 

277 

584 

661 

77 

167 

(1910)351 

184 

IOO 

335 

23S 

79 

143 

64 

Besides  the  demand  for  gold  in  the  arts,  and  the 
apparent  monetary  demand,  as  thus  already  presented, 
we  must  not  omit  to  take  into  account  also  the  large 
stocks  of  gold  held  by  banks  and  institutions  which 
publish  no  statements.  In  the  hands  of  large  private 
institutions  like  those  of  the  Rothschilds,  Bleichroders, 

1  See  the  figures  for  the  monetary  stocks  of  gold  and  silver  in  the  prin- 
cipal countries  of  the  world  given  for  1896  and  19 15  in  the  Reports  of  the 
Director  of  the  U.  S.  Mint,  1896,  pp.  46-47,  and  1916,  pp.  220-221.  It  is 
not  safe,  however,  to  assume  that  these  estimates  are  wholly  correct. 


1896. 
1915- 


Stock  in  Monetary  Use  (in  Millions) 


Gold 


$4>i43 
8,258 

+$4,115 


Silver 


$4,236 
2,441 

— $i,705 


94  MONEY  AND  PRICES 

and  others,  great  amounts  of  gold  are  carried.  It  is 
from  these  stores  that  the  needs  of  states,  such  as 
Austria-Hungary,  France,  Italy,  and  even  the  United 
States  (in  Cleveland's  administration),  have  been  sup- 
plied without  drawing  down  visible  reserves.  The 
difference  between  the  sums  of  gold  in  circulation 
and  in  public  reserves,  on  the  one  hand,  supposedly 
over  $8,000,000,000,  and  the  total  stock  in  191 5, 
on  the  other,  probably  over  $10,000,000,000,  may  be 
regarded  as  the  amount  of  gold  held  by  those  not 
obliged  to  publish  their  holdings. 

Thus  far,  then,  we  have  examined  the  one  factor 
of  demand  for  gold,  among  the  "other  things"  (which 
were  supposed  to  remain  equal).  There  is  abundant 
evidence  to  show  that  the  demand  for  gold,  in  this 
recent  period  of  rising  prices  (1896-1915)  has  been  as 
strong  as,  or  even  stronger  than,  the  demand  for  gold 
in  the  previous  period  (1873-96)  of  falling  prices. 

§  5.  Some  writers  carelessly  reason  directly  from 
the  recent  large  annual  production  of  gold  to  the  re- 
cent contemporary  rise  of  prices.  This  is  an  old  fal- 
lacy. The  new  supply  in  any  period  should  be  com- 
pared with  the  total  stock  of  gold  in  existence  at  the 
beginning  of  that  period.  The  total  available  stock 
is  not — as,  for  instance,  it  is  in  the  case  of  wheat — 
the  annual  supply,  but  all  the  gold  mined  since  1492 
less  the  amount  lost  by  accident,  abrasion,  or  destruc- 
tion in  the  arts.    The  durability  of  gold  causes  all  the 


ANNUAL  GOLD  SUPPLY  AND  STOCK      95 

remaining  past  product — unlike  that  of  such  commodi- 
ties as  wheat — to  form  the  stock  of  to-day.  Because 
of  this  durability  the  total  stock  is  constantly  increas- 
ing, and  as  we  approach  the  present  time  the  annual 
production,  even  though  large,  bears  a  constantly 
smaller  ratio  to  the  total  supply.  A  change  in  the 
demand  or  in  the  annual  supply  affects  at  once  very 
slightly  the  value  of  the  large  total  stock;  while  a 
sudden  new  war  demand  for,  or  a  shortage  in  the 
annual  yield  of,  wheat  produces  a  great  change  in  its 
price.  Therefore,  in  order  to  change  the  value  of  the 
total  stock  of  gold,  the  new  supply  must  be  large — 
not  absolutely,  but  in  relation  to  the  total  world's 
supply.  A  great  rainfall  in  France  a  few  years  ago 
disastrously  raised  the  level  of  the  Seine,  but  it  did 
not  perceptibly  raise  the  level  of  the  Atlantic  Ocean. 
It  takes  a  long  time,  moreover,  for  an  increasing  sup- 
ply of  gold  to  make  its  influence  felt  on  the  value  of 
gold  throughout  the  commercial  world.  It  may  be 
months  after  the  heavy  rains  in  Abyssinia  before  the 
water  rises  in  the  Nile  of  lower  Egypt.  That  is, 
changes  in  prices  due  to  changes  in  the  value  of  the 
total  stock  of  gold,  under  the  influence  of  new  produc- 
tion, must  necessarily  be  slow  and  gradual.  The 
larger  the  accumulated  stock  of  gold — now  over  $10,- 
000,000,000 — the  less  likely  is  it  to  be  influenced  in 
short  periods  of  time  by  any  causes  affecting  gold 
alone.  On  the  other  hand,  a  commodity  like  wheat, 
may  undergo  rapid  or  extreme  changes  in  price  for 


96  MONEY  AND  PRICES 

causes  in  no  way  connected  with  gold  and  which 
affect  only  the  commodity  itself.  Consequently,  seri- 
ous and  rapid  changes  of  price  must  in  general  be  due 
to  other  causes  than  gold— that  is,  to  causes  touching 
the  goods  themselves.  We  arrive,  then,  at  the  con- 
clusion that  changes  of  price  due  to  gold  can  only  be 
very  slow  in  operation,  while  quick  and  frequent 
variations  of  price  must  be  found  in  causes  affecting 
only  goods. 

The  influence  of  the  large  production  of  gold  upon 
the  level  of  prices  in  the  last  few  decades  presents  one 
of  the  most  interesting  problems  in  theoretical  as  well 
as  in  practical  economics.  Since  Ricardo,  and  even 
before  him,  the  familiar  theory  has  been  held  that  an 
increase  of  the  circulating  medium  necessarily  pro- 
duced an  increase  in  the  prices  of  goods.  Yet,  in  the 
United  States,  we  have  had  falling  prices  with  an  in- 
creasing circulation.  Indeed,  the  old  theory  of  Ri- 
cardo and  Hume  no  longer  holds  undisputed  sway. 

There  seems  to  be  general  agreement  that  the  price 
of  an  article,  like  wheat,  is  the  quantity  of  the  given 
standard  for  which  it  will  exchange.  Obviously,  price 
is  an  expression  of  the  exchange  ratio  between  a  com- 
modity, like  wheat,  and  a  standard,  like  gold.  Hence, 
in  these  later  days,  it  has  been  seen  that  this  ratio  can 
be  changed  by  forces  affecting  either  term  of  the  ratio. 
While  the  causes  influencing  the  supply  of  and  de- 
mand for  gold  are  supposed  to  be  constant,  we  know 
that  causes  touching  the  demand  for  and  supply  of 


CAUSES  AFFECTING  GOODS  CHANGE  PRICES    97 

wheat  can  modify  its  gold  price.  A  scanty  harvest 
and  a  reduced  supply  of  wheat,  or  a  new  demand,  will 
raise  its  price;  while  reduced  freights,  improved  proc- 
esses, an  increase  of  supply,  or  a  diminished  demand, 
will  lower  its  price.  These  facts,  touching  wheat 
alone,  are  self-evident;  and  they  show  that  changes 
in  price  are  not  to  be  attributed  solely  to  forces  affect- 
ing the  gold  factor  of  the  price  ratio.  Yet,  it  is  also 
true  that  the  price  of  wheat,  or  of  all  commodities, 
expressed  in  gold,  would  be  affected  by  anything  which 
was  important  enough  to  change  the  value  of  gold. 
Thus  we  see  that  the  problem  of  price  is  one  which 
includes  a  study  of  two  sets  of  forces:  (1)  those  influ- 
encing the  standard,  and  (2)  those  influencing  the  com- 
modities in  the  price  lists.  A  change  in  a  list  of  prices, 
in  itself,  implies  nothing  as  to  the  cause  of  the  change. 
The  originating  cause  may  be  operating  upon  gold, 
or  upon  the  goods;  or  there  may  be  causes  working 
at  once  upon  both  sides,  opposing  or  co-operating.  It 
is,  therefore,  unsafe  to  dogmatize  upon  the  causes  of 
a  change  in  prices  without  an  investigation  into  all 
the  facts  touching  both  gold  and  goods. 

§  6.  Those  who  believe  that  the  rise  of  prices  since 
1896  is  due  to  the  abundance  of  new  gold  have  diffi- 
culty in  showing  by  what  direct  economic  processes 
the  new  gold  affects  prices.  Theoretically,  it  is  as- 
sumed that  the  increased  gold  must  be  offered  against 
goods  and  thus  declines  in  value.    But  what  is  the 


98  MONEY  AND  PRICES 

force  that  impels  a  man  with  gold  in  his  pocket  to 
give  more  than  before  for  a  commodity  freely  pro- 
duced and  sold  in  the  open  market  ?  If  any  one  seller 
raised  his  price  in  view  of  larger  buyers'  funds,  without 
an  increase  in  his  expenses  of  production,  other  pro- 
ducers and  sellers  would  compete  in  keeping  down  the 
price.  Such  a  theory  is  too  detached  from  the  facts 
to  receive  credence. 

It  may  be  claimed,  however,  that  the  entrance  of 
new  gold  in  large  sums  into  the  currencies1  of  the 
world  since  1896  indicates  precisely  the  way  by  which 
it  can  be  offered  as  increased  purchasing  power  against 
goods  and  thus  increase  prices.  But  in  precisely  the 
same  way  one  might  say  that  the  new  crops  of  the 
United  States — new  wealth  created  from  the  soil  in 
one  season,  worth  (without  counting  expenses  of  pro- 
duction) from  $8,000,000,000  to  $12,000,000,000 — give 
new  purchasing  power  to  its  owners,  as  well  as  new 
gold;  that  they,  too,  are  offered  for  other  goods  and 
thus  ought  to  raise  prices.  Moreover,  if  the  new  gold 
has  increased  prices  by  entering  the  currencies  of  lead- 
ing countries,  how  does  it  happen  that  prices  have 
risen  quite  as  high  in  the  United  States  as  elsewhere, 
in  spite  of  the  fact  that  with  us  gold— although  the 
standard  of  prices — is  almost  never  used  as  a  medium 
of  exchange  in  the  actual  purchase  of  goods? 

The  better  thinkers,   to  meet  this  difficulty,  urge 
that  the  new  gold  flows  into  the  reserves  of  banks, 


INCREASED   GOLD  AND   BANK  LOANS      99 

makes  larger  loans  possible,  thus  increasing  the  credit 
or  purchasing  power  offered  against  goods  and  con- 
sequently raising  general  prices.  Here  again  appears 
the  old  fallacy  of  supposing  that  the  prices  of  freely 
reproducible  goods  are  fixed  only  by  the  demand. 
Indeed,  it  ought  not  to  be  necessary  to  repeat  that 
supply  (and  expenses  of  production)  also  affects  price 
as  well  as  demand.  Steel  rails  have  a  price  fixed  not 
merely  by  the  fact  of  an  urgent  demand,  but  by  the 
expense  of  producing  the  needed  supply,  which  expense 
is  far  less  than  it  was  a  few  decades  ago. 

But  let  us  appeal  to  banking  practice.  Because 
there  is  more  gold  in  the  world  do  banks  in  the  United 
States  necessarily  expand  their  loans?  Certainly  not. 
First,  a  bank  decides  whether  the  loan  is  safe  or  not; 
then,  if  a  new  loan  is  made,  and  a  credit  in  the  form  of 
a  deposit  account  is  given,  the  bank  may  need  more 
reserves.  It  is  possible  in  times  of  prosperity,  that  an 
increasing  number  of  persons  who  have  salable  goods 
in  warehouses  or  in  transit  may  wish  loans.  Speaking 
generally,  the  more  goods  produced  and  exchanged 
the  more  loans  are  wanted.  Thus,  first  having  met 
the  demand  for  legitimate  loans,  the  bank  as  a  conse- 
quence arranges  to  supply  the  reserves  (whether  in 
gold,  or  even  in  lawful  money)  required  by  law  or 
banking  experience.  As  a  matter  of  banking  common 
sense,  the  increase  of  loans  is  the  cause  of  increased 
reserves;  not  that  the  increase  of  reserves  is  the  cause 
of  making  loans.     It  is  not  the  presence  of  gold  in  the 


ioo  MONEY  AND  PRICES 

country  which  is  the  cause  of  increased  loans,  any  more 
than  an  increased  number  of  freight-cars  is  the  cause 
of  an  increased  movement  of  goods.  If  increased  loans 
are  wanted,  the  ease  in  getting  gold  reserves  makes  the 
process  easier;  just  as  when  crops  are  large  an  abun- 
dance of  cars  makes  shipment  easier.  No  matter  how 
plentiful  gold  may  be,  if  the  bank  has  not  the  means 
to  offer  for  the  gold,  how  can  it  increase  its  reserves? 
No  matter  how  abundant  railway-cars  may  be,  crops 
may  be  scant.  However  abundant  gold  is,  a  bank 
can  meet  the  demand  for  increased  loans  only  out  of 
the  capital  or  deposits  in  its  possession.  It  would  be 
absurd  to  assume  that  an  abundance  of  new  gold 
would  allow  a  bank  having  a  capital  of  only  $100,000 
and  small  deposits,  to  lend  indefinitely,  say,  to  $100,- 
000,000.  A  large  bank  carries  a  large  sum  of  loans, 
not  because  gold  is  abundant,  but  because  its  funds  in 
hand  are  large;  it  uses  out  of  its  large  funds  only  that 
sum  which  is  necessary  to  get  the  gold  or  lawful  re- 
serves that  experience  shows  are  necessary  for  its 
discounting  business.  To  say  that  the  presence  of 
abundant  gold  is  the  cause  of  increased  loans  is  to  put 
the  cart  before  the  horse.  It  would  be  like  saying  that 
the  cause  of  the  excavation  of  earth  in  the  Panama 
Canal  was  the  existence  of  steam-shovels,  irrespective 
of  the  grant  of  funds  to  buy  shovels.  The  banks  lend 
the  use  of  capital,  not  money;  while  cash  reserves  are 
only  a  tool,  or  a  part  of  the  machinery  necessary  in 
banking   operations.    Indeed,    millions   of   loans   are 


RECENT  RISE  OF  PRICES  101 

made  and  repaid  by  checks  without  the  use  of  a  cent 
of  money.  In  fact,  no  matter  how  abundant  gold  is, 
a  bank  keeps  not  a  dollar  more  of  inert,  non-earning 
reserves  than  is  necessary  for  carrying  the  sum  of  loans 
consistent  with  its  present  resources. 

§  7.  There  are,  moreover,  other  objections  to  ascrib- 
ing the  rise  of  prices  since  1896  to  the  abundance  of 
new  gold.  Some  writers  have  been  induced  to  assign 
the  chief  role  to  gold  under  the  impression  that  the 
rise  of  prices  has  been  general  throughout  all  countries, 
that  all  commodities  have  been  affected,  and  that  such 
a  result  must  have  been  due  to  a  single  universal  cause 
like  gold. 

In  Great  Britain,  the  Economist  and  Sauerbeck 
tables  have  been  referred  to  as  showing  a  great  fall 
in  the  value  of  gold  due  to  the  rise  of  prices.  Curi- 
ously enough  the  index  numbers  of  the  London  Econ- 
omist (for  only  22  series)  show  a  figure  of  2.236  in  1890, 
2.136  in  1905,  2.197  m  1909-  That  is,  in  the  twenty 
years  from  1890  to  19 10  there  was  no  rise  of  Brit- 
ish prices,  in  spite  of  a  new  production  of  gold  in 
these  years  amounting  to  $5,881,000,000.  A  rise  of 
prices  came  later,  in  191 2-14.  In  Sauerbeck's  table 
(chiefly  extractive  products)  the  index  number  was  72 
in  1890  and  1891,  72  in  1905,  73  in  1908,  and  78  in 
1910.  The  average  of  1902-11  was  only  74.  Obviously 
these  English  figures  do  not  prove  that  any  serious  rise 
of  prices  to  191 1  took  place  in  all  countries.     In  Ger- 


102  MONEY  AND  PRICES 

many,  Schmitz's  total  index  number  in  1890  was  107.5, 
and  in  1910  was  11 3. 6 — not  a  startling  change  of  level 
(some  5.6  per  cent.). 

In  the  United  States  the  rise  was  greater  than  in 
the  countries  just  mentioned,  but  not  as  great  as  is 
generally  supposed — chiefly  because  comparisons  are 
apt  to  be  made  with  the  exceptionally  low  level  of 
1896.  Bradstreet's  index  number  for  January  1,  1890, 
is  90.191,  for  1905  is  100.318,  for  1910  is  123.434 — 
about  the  same  level  as  in  191 2.  The  index  number 
of  the  United  States  Bureau  of  Labor  (Bulletin  173) 
for  1890  was  1 1 2.9;  for  1905  was  115.9,  and  for  1910 
was  13 1. 6.  That  is,  there  was  an  average  rise  of  16 
per  cent,  in  American  prices.  Certainly  the  recent 
rise  of  prices  has  not  been  the  same  in  all  countries. 
If  we  make  a  comparison  of  the  general  level  (see 
Chart  III)  in  191 5  with  that  of  1850-60,  it  is  surpris- 
ing to  discover  that  prices  on  the  average  are  no  higher 
in  191 5  than  in  1850-60,  in  spite  of  the  fact  that  the 
available  stock  of  gold  has  been  quintupled  since  1850. 
Such  cold  facts  make  it  very  plain  that  many  other 
forces  than  the  quantity  of  gold  have  been  working 
on  the  level  of  prices. 

But  neither  has  the  rise  of  prices  been  uniform  in 
any  one  country  like  the  United  States — the  ground 
for  attempting  to  prove  a  common  cause  such  as  the 
value  of  gold.  A  study  of  the  tables  of  the  Bureau  of 
Labor  discloses  the  remarkable  fact  that  out  of  203 
commodities,  36  actually  fell  in  price  by  1908,  and  2 


RISE  OF  PRICES  NOT  UNIFORM  103 

remained  unchanged.  These  36  were:  hops,  sugar 
(granulated),  mutton  (dressed),  soda-crackers,  apples 
(evaporated),  pepper,  prunes  (California),  tea  (For- 
mosa), mackerel,  Rio  coffee,  soda  (bicarbonate),  covert- 
cloth,  ginghams,  sheetings,  chinchilla  overcoatings,  can- 
dles, matches,  lead  pipe,  shovels,  nails  (wire),  wood 
screws,  silver,  putty,  quinine,  alcohol  (wood),  white 
granite  cups  and  saucers,  nappies  (glass),  tumblers 
(glass),  carving-knives,  knives  and  forks,  manila  rope, 
manila  wrapping-paper,  and  wood  paper  for  news- 
papers. 

Then,  too,  while  the  average  rise  of  all  the  203 
commodities  from  1890  to  1908  was  only  9  per  cent., 
there  was  no  uniformity  of  movement  in  the  various 
groups  within  the  whole  list.  For  instance,  farm  prod- 
ucts rose  from  no.o  to  133. 1;  fuel  and  lighting  from 
104.7  to  130.8;  while  drugs  and  chemicals  show  little 
or  no  rise  at  all.  Moreover,  there  are  wide  variations 
in  the  prices  of  the  same  goods  within  any  one  year, 
which  show  how  important  other  causes  than  gold 
must  be;  for  these  great  changes  cannot  possibly  be 
assigned  to  gold.  A  few  instances  of  changes  of  whole- 
sale prices  entirely  within  the  year  1908  will  suffice: 

Cattle 110.3-142.0  Lard 115.4-159.0 

Fresh  beef 117.0-142.3  Mutton 87.5-150.0 

Hides 100.7-170.8  Cotton 118.7-150.4 

Milk 88.2-156.9  Calico 90.6-133.7 

Butter 102.5-141.8  Cotton  flannels 109.6-128.9 

Bacon 106.4-161.2  Ginghams 90.6-115.3 

Hams 97.2-131.8  Print-cloths 105. 7-145.3 


104  MONEY  AND  PRICES 

In  studying  the  movements  of  prices  it  is  to  be  ob- 
served that  the  single  index  number  giving  the  com- 
bined average  of  the  changes  in  price  in  any  one  year 
will  not  in  itself  disclose  the  diversity  of  changes  going 
on  in  separate  groups  of  goods,  or  in  any  individual 
article.  In  order  to  get  the  facts  for  any  investiga- 
tion into  the  causes  affecting  the  movement  of  prices 
in  certain  groups  of  commodities,  [there  are  presented 
in  Chart  IV  the  diverse  movements  of  eight  groups  of 
products  which  formed  the  basis  for  the  computation 
of  the  general  average  of  prices  by  the  Bureau  of  Labor. 
It  will  be  noted  at  once  that  the  separate  variations  of 
the  several  groups  are  so  marked  as  to  make  clear  the 
absence  of  any  one  common  cause.  The  only  infer- 
ence as  to  a  general  cause  seems  to  be  that  there  was 
a  distinct  fall  of  prices  following  the  panic  of  1893, 
and  a  general  tendency  to  a  rise  after  the  beginning 
of  recovery  in  1897.  As  we  have  shown  elsewhere, 
these  sudden  and  extreme  fluctuations  of  price  could 
not  have  been  due  to  gold,  but  to  causes  necessarily 
affecting  trade  in  the  goods  themselves. 

For  the  same  reason  that  light  is  thrown  on  the 
forces  influencing  prices  by  separating  the  total  aver- 
age into  the  averages  for  each  group  (Chart  IV),  it 
would  also  be  desirable  to  separate  the  average  for  each 
group  into  the  lines  representing  the  changes  of  price 
for  single  commodities.  Inasmuch  as  the  actual  quo- 
tations for  each  separate  article  are  the  elements  out 
of  which  the  resultant  average  for  all  goods  is  computed, 


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106  MONEY  AND   PRICES 

we  have  in  the  price  fluctuations  of  separate  articles 
the  only  safe  basis  for  examining  into  the  causes  oper- 
ating upon  the  prices  of  goods  as  distinct  from  those 
operating  on  gold.  For  this  purpose  I  have  had  pre- 
pared diagrams1  showing  the  change  of  price  from  1890 
to  1906  of  more  than  100  separate  commodities  which 
had  the  most  importance  in  the  market.  These  are, 
of  course,  too  numerous  to  be  reproduced.  The  most 
striking  phenomena  observed  were  the  rapid  and  ex- 
treme variations  in  the  changes  of  individual  prices. 
It  is  impossible  to  assign  these  to  changes  in  the  value 
of  gold.  On  the  other  hand,  there  was  a  general  tend- 
ency to  higher  prices  after  1897,  which  might  reason- 
ably be  regarded  as  due  to  some  common  cause  or  to 
a  set  of  causes  working  together  in  the  same  direction. 

§  8.  In  trying  to  find  the  various  causes,  inde- 
pendent of  gold,  which  could  influence  prices,  especially 
through  expenses  of  production  of  the  goods  themselves, 
we  may  enumerate  the  following: 

(1)  Inventions  and  increased  skill  of  management. 

(2)  Tariffs  and  taxation. 

(3)  Higher  cost  of  materials. 

(4)  Higher  wages  for  the  same  effort. 

In  studying  the  causes  of  the  change  in  prices  in 
1 896-1 91 5  we  shall  have  some  guidance  in  the  study  of 
the  period  from  1850-96.  In  the  recent  period  there 
was  a  rise  of  prices;   in  the  earlier  period  there  was  a 

1  Much  help  was  given  me  by  Mr.  Carl  Lambach. 


EFFECT  OF   IMPROVEMENTS   ON  PRICES     107 

fall  of  prices.  Obviously,  while  the  same  fundamental 
forces — both  on  the  side  of  gold  and  on  the  side  of 
goods — were  at  work  in  both  periods,  yet  there  must 
have  been  different  combinations  of  these  forces  in 
the  two  periods  under  consideration.  In  spite  of  the 
great  additions  to  the  supply  of  gold  in  1850-96,  the 
effect  of  a  new  demand  for  gold,  together  with  the 
phenomenal  cheapening  of  the  expenses  of  providing 
goods  by  opening  up  new  resources  and  by  the  use  of 
improved  methods,  far  outweighed  all  other  influ- 
ences, and  led  to  a  general  fall  of  prices.  From  1895 
to  19 1 5  the  introduction  of  improved  machinery, 
better  methods  of  manufacture,  applications  of  sci- 
ence to  production  tending  to  lower  prices,  while 
appearing  with  more  or  less  importance,  seem  to  have 
been  overwhelmed  by  other  potent  forces  tending  to 
increase  the  expenses  of  production.  In  fact,  while 
trying  to  ascertain  the  causes  for  a  given  change  of 
prices  we  are  obliged  to  see  that  the  resultant  is  a  com- 
plex of  several  co-operating  and  antagonistic  forces;  and 
only  by  analyzing  each  and  weighing  the  relative  im- 
portance of  each  for  or  against  a  rise  can  we  reach  any 
sane  conclusion.  In  this  case,  (1),  the  cheapening  by 
improved  processes  of  production,  has  not  been  so 
strong  an  influence  as  the  forces  (2),  (3),  and  (4),  tend- 
ing to  keep  prices  at  a  higher  level. 

One  cause  of  the  higher  level  of  prices — one  which 
was  especially  operative  in  the  United  States  and  the 
Continental  countries  of  Europe — was  the  increasing 


108  MONEY  AND  PRICES 

rates  of  customs  tariffs  and  of  taxation  due  to  mili- 
tarism. It  is  impossible  to  attribute  the  generally 
higher  prices  due  to  the  heavy  load  of  taxation  laid 
upon  the  consumer  to  a  general  cause  like  the  cheapen- 
ing of  gold.  In  the  United  States  the  enormous  sums 
spent  by  our  national  government  on  harbors  and 
rivers,  on  pensions,  on  the  army,  and  especially  on 
the  new  navy,  must  be  paid  for  by  somebody;  and  that 
somebody  was  the  consumer  of  the  taxed  goods.  On 
an  average,  imported  dutiable  goods  were  increased  in 
price  to  the  American  consumer  by  over  40  per  cent. 
But,  to  the  extent  that  importations  were  impeded,  not 
all  of  this  tax  of  over  40  per  cent,  went  to  the  govern- 
ment, since  much  of  it  went  to  the  protected  interests. 
The  duties  were  so  high  as  not  to  be  revenue  duties,  for 
our  treasury  got  only  about  $300,000,000  of  this  tax, 
or  less  than  half  of  its  then  annual  expenditure.  The 
truth  is  just  coming  home  to  the  mass  of  people  that 
our  extremely  high  protective  duties  have  raised  the 
expenses  of  producing  many  goods,  raised  prices,  and 
raised  the  cost  of  living  to  every  family  throughout  the 
length  and  breadth  of  the  land.  This  is  one  reason 
why  industrial  activity  to-day  spells  "hard  times"  for 
the  unorganized  consumer. 

Some  of  our  public  men  were  not  dealing  fairly  with 
the  people  when  they  directed  attention  solely  to  the 
Payne- Aldrich  Act  of  1909,  and  asserted  that  it  had  in 
some  respects  lowered  duties.  Suppose  that  it  had 
done  so,  as  compared  with  the  Dingley  Act  of  1897. 


TAXES  ON  RAW  MATERIALS  109 

Then,  that  only  transferred  the  cause  of  offending  to 
the  duties  fixed  by  the  Dingley  Act,  which  were,  on  the 
whole,  the  highest  in  our  list  of  high-tariff  enactments. 
It  is  no  comfort  to  a  drowning  man  in  forty  feet  of 
water  to  be  told  that  just  back  of  him  the  water  was 
forty-one  feet  deep.  It  is  no  comfort  to  the  con- 
sumer submerged  by  import  duties  of  forty,  or  a  hun- 
dred, or  several  hundred  per  cent.,  to  be  told  that  a 
microscope  will  discover  a  fractional  change  of  a  per 
cent,  here  and  there — when  in  fact  hosiery,  gloves,  and 
clothing  bear  increased  duties.  It  is  not  ingenuous  to 
harp  on  the  insignificant  changes  in  the  Act  of  1909, 
when  the  real  burden  was  made  heavy  in  1897,  and 
only  continued  in  1909. 

It  is  not  fair,  of  course,  to  charge  the  increase  in  the 
prices  of  all  goods  to  the  tariff.  The  most  pernicious 
and  the  most  direct  effect  of  our  high  protective  tariff 
is  to  be  found  in  the  duties  upon  raw  materials,  where 
the  taxes  on  materials  unduly  raise  the  prices  of  fin- 
ished goods.  For  instance,  if  foreign  wools  (required 
in  various  mixtures  of  clothing  fabrics)  be  taxed  40 
per  cent.,  then,  if  the  woollen  manufacturers  were  to 
receive  an  additional  protection  of  40  per  cent,  on 
their  finished  goods,  it  would  be  40  per  cent,  on  an 
outlay  increased  by  the  tax  on  their  materials.  Thus 
by  complicated  compensatory  duties,  the  consumer 
pays  60  or  80  per  cent,  more,  in  cases  where  he  should 
pay  on  woollen  goods  only  40  per  cent.,  provided  raw 
materials  were  free.    An  illustration   of   the  heavy 


no 


MONEY  AND   PRICES 


burden  thus  laid  upon  all  of  us  by  the  tariff  may  be 
found  in  the  case  of  wool  and  woollen  goods.  Wool 
was  made  free  in  the  Wilson  Act  of  1894;  and  taking 
the  average  prices  of  1890-98  as  100,  the  comparison 
between  the  prices  of  wool  and  woollen  goods  in  1896, 
before  the  Dingley  Act,  and  1908  may  be  seen  in  the 
following  table: 


PRICES,  1 896-1908.      1890-98=100 


Articles 

Wool 

Blankets  (wool) 

Broadcloths 

Carpets 

Flannels 

Horse-blankets 

Overcoatings  (wool) 

Shawls 

Suitings , 

Underwear  (wool) , 

Women's  dress-goods  (wool) . 
Worsted  yarn 

Two-bushel  bags 

Cotton  flannels 

Cotton  thread , 

Drillings 

Sheetings 

Shirtings 

Hides 

Leather  (harness) 

Currants 

Molasses 

(All)  Metals  and  implements 


1896 


1908 


(1897) 


70.6 
89-3 
79-7 
90.2 

85-4 
90.8 

86.7 
89.1 
87.8 
92.7 

67  5 

72.9 

91.6 

93-9 
99.6 
100.2 
97-4 
97-9 

86.6 
98.6 
87.2 
83.1 
93° 


118. 3 
113. 1 
115. 6 
118. 9 
122.4 
126.5 
122.6 
(1907)  107.0 
127.6 
«5-8 

127. 1 

117. 6 

134-3 

119. 2 

131  -7 
130.6 
120.0 
120.0 

142.6 
121 .1 
162.4 

112. 7 
125.4 


In  order  to  show  the  actual  rise  of  prices  fairly 
chargeable  to  the  extremely  high  tariffs  since  1897,  a 


THE  DINGLE Y  TARIFF  ACT  in 

few  other  articles  besides  wool  and  woollens  have  been 
added  to  this  table  taken  from  the  cotton  schedules 
(where  the  increase  cannot  be  charged  to  the  duty  on 
raw  cotton).  An  increase  of  25  to  35  per  cent,  is  not 
infrequent.  And  in  the  metals  schedule  (for  which 
also  we  supply  our  own  raw  materials)  the  rise  in  price 
was  directly  affected  by  the  duties  on  the  finished 
goods.  One  is  struck  by  the  precipitous  climb  of  prices 
of  those  articles  affected  by  the  Dingley  Tariff  Act 
immediately  after  its  passage  in  1897.  This  can  be  ob- 
served in  lines  F,  D,  C,  and  G  in  Chart  IV;  but  the 
effect  of  the  tariff  is  much  more  clearly  seen  in  the 
many  price  lines  of  separate  articles,  such  as  carpets, 
glass,  wool,  woollens,  blankets,  earthenware,  furniture, 
jute,  files,  wood  screws,  cut  nails,  wire  nails,  augers, 
chisels,  hammers,  planes,  axes,  sheetings,  worsted 
yarns,  women's  dress-goods,  barbed  wire,  molasses, 
shovels,  tickings,  etc. 

It  may  have  been  said  that  as  far  back  as  1898  no 
one  grumbled  about  the  high  cost  of  living,  although 
we  had  as  high  a  tariff  then  as  later;  hence  it  might 
have  been  said  the  higher  prices  could  not  have  been 
ascribed  to  the  tariff.  To  ascertain  the  effect  of  the 
tariff,  however,  the  true  comparison  should  be  made 
between  prices  in  1894-97  and  in  the  period  from  1897 
on.  The  former  was  a  time  of  low  prices,  aggravated, 
to  be  sure,  by  the  panic  of  1893;  while  the  latter  was 
throughout  a  period  of  rapidly  rising  prices.  The  panic 
of   1893   was  due  ultimately  to  overexpansion,   and 


ii2  MONEY  AND  PRICES 

immediately  to  the  fear  of  the  silver  standard.  One 
can  have  little  respect  for  the  absurd  reason,  given  by 
politicians  for  the  cause  of  the  panic  of  1893,  that  it 
was  caused  by  the  Wilson  Act  of  1894  or  the  fear  of 
its  passage.  As  a  matter  of  fact  the  panic  came  on 
long  before  the  act  was  passed.1 

The  rise  of  prices  due  to  heavy  taxation  has  cer- 
tainly not  been  confined  to  the  United  States.  The 
tendency  to  higher  protective  duties  in  Europe  and  the 
phenomenally  heavy  taxes  required  by  military  and 
naval  establishments  all  help  to  explain  whatever 
there  was  of  a  general  cause  behind  the  movement  of 
prices  to  a  higher  level  in  all  countries.  The  extrava- 
gance of  States  and  municipalities  in  public  works, 
the  waste  of  city  funds  in  official  corruption  in  our 
land  was  all  being  paid  for  in  taxes  by  the  individual 
consumer  in  the  higher  expenses  of  production  and 
consequently  in  a  higher  level  of  prices. 

Recent  years  have  also  witnessed  an  increase  in  the 
prices  of  articles  used  in  further  manufacture.  What- 
ever the  cause  of  this  increase,  it  is  evident  that  it 
would  produce  a  distinct  addition  to  the  expenses  of 

1  Moreover,  although  it  has  been  said  that  the  subsequent  Act  of  1909 
made  inconsiderable  changes  in  duties,  it  is  very  significant  that,  in  antic- 
ipation of,  and  following,  the  act  of  August,  1909,  Bradstreet's  index 
number  should  have  shown  such  a  marked  upward  tendency,  as  follows: 

January  i,  1909 8.2631  August  1,  1909 8.5039 

February  1 8.3022  September  1 8.5906 

March  1 8.2167  October  1 8.7478 

April  1 8.3157  November  1 8.9635 

May  1 8.3016  December  1 9.1262 

June  1 8.3960  January  1,  1910 9.2310 

July  1 8.4573 


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ii4  MONEY  AND  PRICES 

production  of  many  staples  of  the  market,  leading  to 
a  rise  in  the  prices  of  the  goods  into  which  they  enter 
as  materials.  This  rise  of  prices  of  materials  is  no^ 
table  in  pig  lead,  tar,  oxide  of  zinc,  sheet  zinc,  tin 
plates,  bricks,  rubber,  crude  petroleum,  wool,  lumber, 
cotton,  hides,  coal,  Bessemer  pig,  coke,  and  pig  iron.  In 
each  case  there  was  a  cause  peculiar  to  the  commodity 
which  would  explain  its  rise  of  price.  Under  shortage  of 
supply  we  may  cite  rubber,  or  lumber;  under  monopoly, 
coal  and  pig  iron;  under  the  tariff,  tin  plates,  wool,  and 
hides.  In  no  instance  would  it  be  necessary  to  have 
recourse  to  such  a  common  cause  as  a  fall  in  the  value 
of  gold. 

§  9.  One  universal  element  in  the  expense  of  pro- 
ducing goods  of  any  kind,  manufacturing  or  agricul- 
tural, is  the  wages  of  labor.  In  the  United  States 
money  wages  per  hour,  expressed  in  gold,  have  risen 
between  1890  and  1907  by  about  28  per  cent.  These 
facts  may  be  seen  in  the  following  table: 

Year  Wages  per  Year  Wages  per 

hour  hour 

1890 100.3  *899 102.0 

1891 100.3  z9°° 105.5 

1892 100.8  1901 108.0 

1893 100.9  1902 112. 2 

1894 97.9  1903 116. 3 

1895 98.3  1904 117. o 

1896 99.7  1905 118. 9 

1897 99-6  1906 124.2 

1898 100.2  1907 128.8 


HIGHER  WAGES  AND  HIGHER  PRICES     115 

Nor  is  the  higher  range  of  wages  confined  to  the  United 
States;  it  is  that  part  of  an  increased  expense  of  pro- 
duction which  is  undoubtedly  common  to  many  coun- 
tries, and  which,  by  making  the  phenomena  of  higher 
prices  wide-spread,  probably  gives  occasion  for  the  be- 
lief that  the  higher  prices,  being  world-wide,  must  be 
due  to  some  one  general  cause  like  gold.  But  it  cer- 
tainly is  true  in  other  lands  that  there  is  little  com- 
plaint of  higher  prices  where  wages  have  not  risen. 
In  England,  for  instance,  cost  of  living  has  not  in- 
creased as  much  as  with  us — even  as  regards  dairy 
products  and  meat.  But  English  wages  are  much  less 
than  ours,  as  a  few  examples  will  show:1 


England  and  Wales 
per  48  hours  week 

United  States 

Bricklayers 

$9. 12-89.85 
8.80-  9.57 
8.60-  9.67 
8.88-10. 14 

$28.8o-$33.6o 
14.40-  28.80 
19.20-  28.80 
24.00-  33.60 

Carpenters 

Plumbers 

Plasterers 

Certainly,  cost  of  living  also  in  France  had  not  yet 
risen  as  much  as  it  had  with  us.  Since  1905  wages 
in  the  next  two  years  had  risen  about  $}4  per  cent., 
or  about  the  same  as  food. 

It  is  not  safe  to  assume,  however,  that  higher  money 
wages  always  and  necessarily  cause  higher  prices.  The 
question  may  be  asked  whether  the  rise  of  wages  is  one 
of  the  causes  of  the  rise  of  prices,  or  whether  the  rise 
of  prices  has  made  possible  the  rise  of  wages.     In  pros- 

1  Computed  from  data  in  Bureau  of  Labor  Bulletin,  77. 


n6  MONEY  AND  PRICES 

perous  periods,  when  prices  are  rapidly  advancing, 
demands  for  higher  wages  are  easily  granted.  That 
is,  since  the  valuation  of  goods  goes  on  separately 
from  the  valuation  of  labor,  and  under  differing  con- 
ditions of  demand  and  supply  for  each,  the  returns 
on  goods  sold  may  compensate  for  any  increase  of 
wages.  In  comparing  the  movement  of  wages  with 
the  movement  of  prices  of  the  goods  on  which  the 
labor  is  engaged,  we  find  in  our  statistical  tables  no 
direct  relation  whatever  between  the  rise  of  prices 
and  the  rise  of  wages.  For  instance,  no  such  connec- 
tion is  shown  in  the  cases  of  window-glass,  silk,  hogs, 
hides,  wheat  and  flour,  paper,  bricks,  and  many  others. 
Unquestionably  influences  independent  of  the  prices 
of  goods  had  acted  on  the  rate  of  wages. 

The  matter  of  pivotal  importance  is  the  efficiency 
of  labor  or  of  the  management.  It  should  be  kept  in 
mind  that  a  quotation  in  a  price-table  is  given  for  only 
a  single  unit  (as  a  bushel  or  pound)  of  a  commodity; 
hence  this  quotation  implies  nothing  as  to  the  num- 
ber of  units  produced  by  the  combined  factors  of 
production  in  any  given  industry.  It  is  not  only  the 
price  of  one  unit,  but  that  price  multiplied  by  the  total 
number  of  units  of  goods  produced  which  determines 
the  income  of  a  concern  and  thus  affects  its  power  to 
pay  higher  wages.  Anything  which  increases  the  num- 
ber of  units  produced  by  an  industry  increases  the  sum 
from  which  higher  wages  can  be  paid.  In  case  higher 
wages  are  forced  by  unions  for  the  same  labor  efficiency, 


HIGHER  WAGES  AND  HIGHER  PRICES     117 

it  may  happen  that  the  managers  can  devise  some  new 
process,  or  use  some  invention,  by  which  more  units 
of  product  can  be  made,  so  that  the  higher  wages 
can  be  compensated  for  by  the  efficiency  of  the  man- 
ager and  the  prices  of  the  goods  remain  the  same. 
It  may  even  happen  that  the  introduction  of  special 
machinery  or  of  improved  processes  may  cause  such 
an  immensely  greater  number  of  units  to  be  produced 
by  the  same  labor  and  capital  that  not  only  may  the 
price  of  each  unit  of  goods  be  lowered,  but  also  the 
total  income  of  the  industry  be  very  much  enlarged; 
thus  it  has  often  happened  that  higher  wages  have  been 
paid  at  the  very  time  when  prices  were  falling.  There- 
fore, while  there  may  be  some  direct  relation  between 
the  total  value  of  the  product  and  wages,  there  may 
be  none  whatever  between  the  price  of  a  single  unit  of 
goods  and  the  rate  of  wages. 

Nevertheless,  in  stationary  conditions  of  industry, 
in  the  times  between  the  introduction  of  new  im- 
provements, an  enforced  rise  of  wages  of  labor  not 
accompanied  by  any  increase  in  the  number  of 
units  of  product,  directly  raises  the  expenses  of  pro- 
duction per  unit  and  leads  to  a  rise  of  prices.  In  in- 
dustries like  agriculture  in  which  machinery  is  less 
relied  on  than  manual  labor,  a  rise  in  wages,  not  carry- 
ing with  it  an  increase  of  efficiency,  will  cause  higher 
prices.  Such  cases  are  very  numerous.  Indeed,  it 
has  been  the  policy  of  the  labor-unions  to  demand  an 
increase  of  wages  because  of  an  increase  of  the  cost  of 


n8  MONEY  AND  PRICES 

living,  and  not  because  of  an  increase  of  the  efficiency 
of  labor.  Consequently  most  of  the  rise  in  wages  due 
to  the  activity  of  labor-unions  must  result  in  higher 
prices.  There  has  been  in  fact  a  marked  advance  in 
wages.  If  so — unless  managers  have  been  able  to 
devise  compensating  improvements — one  of  the  main 
elements  entering  into  the  expenses  of  production  of 
all  kinds  of  goods  has  risen  in  cost,  and  has  had  its 
effect  in  raising  prices.  The  fact  that  wages  have  risen 
all  over  the  world,  seems  to  give  a  reason  for  believing 
in  the  existence — so  far  as  there  is  any — of  a  common 
cause  working  for  higher  prices. 

As  regards  many  other  influences  affecting  prices, 
but  not  directly  through  expenses  of  production,  some- 
thing may  be  said  in  the  next  chapter. 


CHAPTER  IV 
THE   INCREASED   COST  OF  LIVING 

§  i.  The  cause  of  the  rise  of  prices  ceases  to  be 
an  academic  question,  and  becomes  a  very  practical 
one,  the  moment  this  rise  directly  touches  the  cost 
of  living  of  great  masses  of  our  people,  especially  those 
dependent  on  wages  or  fixed  incomes.  No  one  doubts 
that  there  has  been  a  rise  of  prices  greatly  increasing 
the  cost  of  living.  In  previous  chapters  it  has  been 
shown  that  the  causes  of  this  upward  movement  are 
to  be  found  mainly  in  the  forces  affecting — not  the 
value  of  gold,  but — the  expenses  of  producing  and  dis- 
tributing the  goods  themselves.  That  is,  if  the  gold 
standard  in  which  these  prices  are  expressed  has  not 
varied  much  for  causes  affecting  itself  (since  a  new  de- 
mand has  risen  to  meet  a  great  new  supply),  the  prices 
of  goods  must  have  varied  greatly  for  causes  directly 
affecting  the  goods  themselves.  It  is  as  if  a  moun- 
tain peak  had  not  changed  its  elevation  above  the  sea; 
yet  men  may  have  gone  up  or  down  its  side  and  thus 
have  changed  their  position  relatively  to  its  top. 

The  moment  we  pass  from  considerations  touching 

gold  to  those  affecting  goods  themselves,  we  find  at 

once  a  large  group  of  commodities  which  have  risen 

in  price  for  reasons  which  can  in  no  possible  sense  be 

ascribed  to  the  cheapening  of  gold.    This  group,  more- 

119 


120  MONEY  AND  PRICES 

over,  is  the  one  which  most  directly  concerns  the  cost 
of  living  of  every  one.  Without  doubt  one  of  the 
most  important  factors  in  raising  the  cost  of  living  has 
been  the  increased  price  of  food  due  to  the  changing 
conditions  of  agriculture.  While,  as  has  been  noted, 
the  general  rise  of  prices  on  an  average  has  not  been 
as  high  as  generally  supposed,  there  can  be  no  doubt 
as  to  a  general  belief  that  prices  have  decidedly  risen. 
The  cause  of  this  belief  is  clearly  due  to  the  unmistak- 
able rise  of  price  in  the  one  group  of  food  articles  en- 
tering into  all  our  daily  consumption.    (Chart  IV,  B.) 

Farm  and  food  products  have  changed  in  price  for 
obvious  causes  peculiar  to  these  articles  themselves. 
Moreover,  it  is  in  connection  with  these  products — 
especially  meat — that  we  have  heard  most  in  the  re- 
cent discussion  about  the  high  cost  of  living.  Aver- 
ages of  many  commodities  have  little  practical  sig- 
nificance to  the  mass  of  people.  The  social  impor- 
tance in  changes  of  prices  resides  in  those  which  affect 
the  articles  entering  into  the  budgets  of  the  plain 
people.  When  food  rises  in  price  it  is  serious;  but 
when  furs  and  silks  rise  it  is  not  serious. 

First,  what  are  the  facts  before  the  war  as  to  the 
rise  of  prices  of  food?  Taking  the  basis  of  1 896-1 900 
as  100,  according  to  the  secretary  of  agriculture,  the 
14  farm  products  (hay,  cotton,  hogs,  flaxseed,  cattle, 
barley,  wheat,  rye,  corn,  hides,  oats,  etc.)  have  risen 
most.  As  compared  .with  an  average  rise  to  126.4  for 
all  the  groups  combined,  there  had  been  a  rise  in  1908 


RISE  IN  PRICES  OF  FOOD  121 

to  141. 9,  as  compared  with  128.7  f°r  f°°d  products  (47 
articles);  132.8  for  lumber;  12 1.9  for  clothing;  125.3 
for  fuel  and  lighting;  124.9  f°r  metals;  119.5  for  house 
furnishings;  and  106  for  drugs. 

But  averages  of  wholesale  prices  for  groups  of  articles 
have  very  little  interest  for  the  housekeeper.  Food 
products  as  a  group  had  risen  to  128.7  in  1908;  but 
how  as  to  specific  articles?  Taking  1896-1900  as  a 
base  of  100,  the  following  table  will  show  how  much 
such  articles  of  every-day  consumption  had  risen:1 

Milk  (N.  Y.) 129.8 

Eggs 205 . 1 

Creamery  butter 151 . 7 

Factory  cheese 145 . 3 

Mackerel 108 . 2 

Codfish 153 . 1 

Beans 163.4 

Peas 146 . 8 

Potatoes 152.2 

Apples 190.8 

Wool  (Ohio) 137-3 

Hides  (native) 167 .9 

Burley  tobacco 177 . 5 

Here  is  an  increase  of  from  30  to  100  per  cent,  in  articles 
of  food ;  while  other  groups,  such  as  clothing  and  house 
furnishings,  have  risen  some  20  per  cent. 

Such  being  the  facts,  what  are  the  causes  of  the 
increase  in  the  prices  of  farm  and  food  products?  As 
regards  those  articles  consumed  in  every  family,  rich 
or  poor — such  as  milk,  eggs,  butter,  cheese,  beans, 
peas,  potatoes,  apples,  and  the  like — the  answer  is  not 

1  Report  of  the  Secretary  of  Agriculture,  No.  91,  1909,  p.  20. 


122  MONEY  AND  PRICES 

far  to  seek.  In  the  main  it  is  an  increase  of  demand 
out  of  proportion  to  the  available  supply.  The  move- 
ment of  population  from  the  farm  to  the  city  has  been 
going  on  for  decades,  as  every  one  knows.  The  less 
enterprising,  the  less  active,  the  less  educated  have 
been  left  on  the  farms;  the  bad  roads,  the  remoteness 
of  farmhouses,  have  made  social  life  less  attractive  in 
the  country.  The  great  prizes  of  success  in  the  pro- 
fessions and  in  industry,  the  eager,  busy  life  of  the 
towns  and  the  cities,  the  glamour  and  lure  of  the 
varied  excitements  in  the  town,  and  the  desire  to  es- 
cape physical  exertion  and  hardship,  have  drawn  the 
youth  away  from  the  land  and  made  agricultural 
labor  scarce  or  inefficient.  The  labor  economy  of 
agricultural  machinery  cannot  fill  the  gap;  for  the  op- 
erations of  agriculture  are  not  continuous  and  uni- 
form as  in  the  factory.  Therefore,  the  actual  prac- 
tices of  dairy-farming,  crop-growing,  and  treatment  of 
the  soil  have  deteriorated,  with  the  loss  of  brains  and 
labor — only  to  be  checked  (but  not  yet  by  any  means 
reversed)  by  the  splendid  teaching  of  experiment  sta- 
tions and  the  Department  of  Agriculture.  To-day, 
much  of  our  land  does  not  begin  to  yield  what  it  is 
capable  of.  Our  methods  are  bad  and  wasteful — and 
the  supply  of  food  for  the  urban  demand  is  not  coming 
forward  in  the  proportion  of  the  new  demand. 

Moreover,  in  the  older  States  farm-land  has  enor- 
mously increased  in  value.  The  farmers  who  have  ac- 
cumulated a  competence  and  retired  to  the  towns, 


HIGHER  EXPENSES  OF  PRODUCTION     123 

for  instance  in  central  Illinois,  have  not  grown  rich 
primarily  by  the  sale  of  their  crops,  but  chiefly  by  the 
rising  value  of  the  land.  The  farmer  who  now  buys 
land  at  $80  to  $150  an  acre,  and  who  pays  wages  high 
enough  to  draw  labor  away  from  the  city,  must  get 
higher  prices  for  his  products  than  in  the  past,  in  order 
to  cover  his  higher  expenses  of  production.  Includ- 
ing the  greater  cost  of  the  land,  the  higher  prices  of 
labor,  the  phenomenal  rise  in  the  prices  of  lumber  and 
building  materials,  it  is  but  natural  that  the  expenses 
of  producing  foodstuffs  should  have  gone  up,  and 
should  stay  up  permanently,  unless  there  is  to  be  a 
great  national  reaction  in  favor  of  country  life.  From 
this  time  on  we  must  expect  to  see  the  effects  of  an 
increasing  pressure  on  the  land.  Dry  farming  and 
irrigation  are  taking  up  lands  hitherto  unoccupied; 
but,  in  truth,  our  only  real  recourse  is  in  improved 
methods  of  cultivating  the  land  now  under  tillage. 

How  much,  in  particular,  has  meat  risen?  Before 
the  war  unfed  beef  at  the  farm  was  not  much  higher 
than  it  was  before  1900.  The  price  of  beef,  however, 
is  affected  by  four  processes  before  it  gets  to  the  con- 
sumer: (1)  feeding;  (2)  slaughtering;  (3)  wholesaling; 
and  (4)  retailing.  As  against  100  in  1 896-1 900,  steers 
at  Chicago  had  risen  in  1909  to  126-136;  dressed  car- 
casses to  1 23.7-1 29.7;  retail  prices  of  roasts  to  132.3; 
and  of  steaks  to  133.7.  That  is,  beef  had  risen  by 
about  one-third  of  its  price  as  compared  with  the 
average  of  1 896-1 900. 


Horses 264 

Mules 235 

Swine 147 

Sheep 147 

Milch  cows 120 


124  MONEY  AND  PRICES 

Hogs  had  risen  in  price  at  the  farm  in  about  the 
proportional  rise  in  price  of  other  things.  Hogs  had 
risen  to  147.3  m  I9°9j  wholesale  carcasses  to  180.5; 
the  retail  prices  of  fresh  pork  to  about  142  (1907) ;  and 
bacon  to  about  164  (1907). 

But  how  as  to  live  stock?  Live  stock  and  farm 
crops  have  shown  a  special  increase  in  price,  at  the 
farm,  as  follows: 

(100= average  of  1 896-1 900) 

Live  Stock,  1909  Farm  Crops,  1909 

4  Corn 218.6 

1  Oats 209 . 6 

3  Potatoes 192 . 4 

1  Wheat 166 . 2 

4  Rye 162 . 1 

Buckwheat 161 . 9 

Tobacco 161 . 4 

Barley 147 . 3 

Cotton 1384 

Hay 122.9 

Live  stock  average 1931    Crops  average 180.9 

Average  of  live  stock  and  crops 186.9 

There  is  not  much  difficulty  in  finding  the  special 
causes  of  the  high  prices  of  beef.  The  free  range  has 
disappeared;  government  lands  can  no  longer  be 
fenced  by  cattle-rangers;  the  old  ranges  have  been 
taken  up  and  cultivated  as  farms;  and  the  future 
supply  of  cattle  must  come  from  the  stock  produced 
in  connection  with  general  farming.  The  old  sources 
of  supply  of  cattle  can  no  longer  be  counted  on.  More- 
over, in  1906  there  was  a  rush  to  market  cattle  and  the 
general  decrease  in  the  existing  supply  in  that  year  was 


GOLD  AND   FOOD   PRICES  125 

felt  for  a  long  period.  In  addition,  the  doubling  of  the 
price  of  corn  and  oats,  the  high  prices  of  alfalfa  and 
hay,  have  very  greatly  raised  the  cost  of  feeding  cat- 
tle before  they  are  sent  to  slaughter.  The  price  of 
fed  cattle  is  the  highest  on  record.  If  so,  the  whole- 
sale and  retail  prices  must  rise  in  proportion.  The 
recent  somewhat  hysterical  boycott  of  meat  cannot 
change  the  underlying  cause  of  the  high  prices  of  farm 
products,  including  meat.  By  refraining  from  eating 
high-priced  meats  a  consumer  can  lower  his  expenses, 
but  not  the  general  level  of  meat  prices.  It  is  possi- 
ble, however,  for  him  to  buy  cheaper  cuts,  and  learn 
how  to  prepare  nutritious  food  by  more  skilful  cook- 
ing. In  the  choice  of  our  dietary  there  is  certainly  a 
wide  margin  for  saving  without  loss — or  even  with  a 
gain — in  nutriment. 

In  the  group  of  food  products  we  find  frequent  and 
extreme  fluctuations  of  prices.  Since  these  changes 
are  so  evidently  due  to  the  abundance  or  failure  of  the 
crops  in  particular  seasons,  no  one  would  for  a  mo- 
ment think  of  assigning  these  changes  to  a  change  in 
the  value  of  gold,  which,  at  the  best,  can  only  be 
gradual  and  moderate  and  which  is  manifest  only 
after  a  fairly  long  period  of  time.  No  one  needs  to 
be  told  that  a  failure  of  the  wheat  crop  in  Argentina 
will  quickly  affect  the  markets  in  Chicago  and  Liver- 
pool. The  changes  directly  referable  to  influences 
operating  on  the  commodities  themselves,  such  as 
good  or  bad  seasons,  are  clearly  seen  in  the  price  lines 


126  MONEY  AND  PRICES 

drawn  (but  not  here  reproduced)  for  the  following  in- 
dividual articles:  cotton,  cattle,  flaxseed,  hops,  wheat, 
flour,  corn,  cornmeal,  coffee,  prunes,  beans,  apples, 
onions,  rye,  buckwheat,  hay,  potatoes,  rice,  and  tea. 
In  the  whole  period,  1890-1915,  farm  products  have 
risen  in  price  by  53  per  cent.,  and  food  by  18  per  cent., 
as  against  an  average  rise  in  all  commodities  of  22 
per  cent. 

In  general,  this  rise  in  the  prices  of  food  is  an  in- 
fluential cause  of  higher  prices  in  general,  and  is  one 
of  the  "other  things"  which  has  been  at  work  quite 
independently  of  the  quantity  of  new  gold.  More- 
over, the  indirect  effect  of  high  prices  of  food  produces 
the  most  serious  practical  problem.  It  wipes  out  all 
the  gain  of  previous  increases  of  wages,  and  drives 
laborers  to  repeat  their  demands  for  higher  pay,  thus 
working  again  to  increase  expenses  of  production.  It 
is  not  too  much  to  say  that  the  gains  of  labor,  shown 
by  the  fall  in  prices,  as  they  stood  about  1890,  have 
been  lost  to  us  by  the  high  tariffs  of  1897,  by  the 
wastes  of  bad  farming,  and  the  recent  high  costs  of 
agricultural  products. 

§  2.  Our  analysis  would  be  inadequate,  however, 
if  we  stopped  with  an  examination  of  expenses  of  pro- 
duction. The  really  practical  problem  is  still  before 
us  in  trying  to  analyze  the  forces  at  work  fixing  prices 
in  that  vague  and  dangerous  margin  between  actual 
expenses  of  production  and  the  prices  in  fact  paid  by 


PRICES  ABOVE  EXPENSES  OF  PRODUCTION    127 

the  consumer.  It  is  in  this  margin  that  we  find  in 
operation  the  "other  things"  mentioned  in  Part  I, 
b,  4),  $),  and  6).1 

The  whole  raison  d'etre  of  monopolistic  combina- 
tions, for  instance,  is  to  control  prices  and  prevent 
active  competition.  As  every  economist  knows,  in 
the  conditions  under  which  many  industries  are  to-day 
organized,  expenses  of  production  have  no  direct  re- 
lation to  prices.  In  such  conditions,  there  is  a  field 
in  which  the  policy  of  charging  "what  the  traffic  will 
bear"  prevails;  and  this  includes  industries  that  are 
not  public  utilities.  It  is  obvious  to  every  one  that 
the  seller  is  constantly  trying  to  get  the  highest  pos- 
sible price.  The  buyers,  as  a  rule,  are  a  loose  unor- 
ganized mass;  while  in  these  latter  days  the  sellers 
are  likely  to  be  well  organized.  But  even  apart  from 
compact  organization,  if  the  producers  and  sellers  can 
control  the  supply,  or  create  only  a  quasi-monopoly, 
they  would  have  the  unorganized  consumers  at  their 
mercy.  That  is,  we  have  here  a  cause  working  to 
raise  the  prices  of  goods  whose  expenses  of  produc- 
tion may  not  have  been  raised.  Sometimes  it  is  true 
that  combinations  by  introducing  new  processes  lower 
expenses  of  production;  but  by  a  greater  or  less  con- 
trol of  the  markets  they  are  able  to  intercept  for  them- 
selves some  of  the  results  of  economies  which,  in  a 
purely  competitive  regime,  would  go  entirely  to  the 
consumer. 

1  See  p.  79. 


128  MONEY  AND  PRICES 

In  the  discussion  of  protectionism  it  has  been  argued 
that  tariffs  do  not  raise  the  prices  of  protected  goods 
to  the  home  consumer,  because  competition  between 
the  home  producers  will  always  prevent  more  than 
ordinary  gains,  and  keep  prices  at  a  normal  level. 
•  But  when  combinations  succeed  in  controlling  the 
price  this  is  no  longer  true.  Thus,  the  maintenance 
of  monopoly  prices  becomes  possible  to  the  full  extent 
of  protecting  duties,  provided  imports  are  prevented 
from  competing  with  the  monopolized  products  at 
home.  An  illustration  in  point  appears  in  the  duty 
on  wood-pulp  and  paper,  which  has  allowed  the  com- 
bination to  control  the  price  of  printing  paper  to  the 
American  newspapers.  And  there  are  many  similar 
cases. 

The  influence  of  the  tariffs  and  of  combinations  in 
recent  years  is  closely  connected.  The  formation  of 
combinations  has  been  unquestionably  one  of  the 
strongest  forces  in  recent  years  working  for  higher 
prices.  It  is  the  one,  better  than  any  other,  which 
explains  the  rapid  rise  in  the  years  from  1897  to  1900 
— the  very  years  of  the  greatest  activity  in  the  forma- 
tion of  great  "trusts,"  such  as  those  in  tin-plate,  wire, 
steel,  copper,  and  a  long  list  of  others.  The  very  close 
relation  of  combinations  to  tariff  duties  makes  the  be- 
ginning of  the  great  rise  of  prices  which  was  synchronous 
with  the  passage  of  the  Dingley  Act,  July  24,  1897, 
very  significant. 

As  every  one  knows,  combination  is  the  order  of 
the  day,  and  it  has  affected  nearly  every  article  of 


TARIFFS  AND   COMBINATIONS  129 

general  consumption,  among  which  may  be  mentioned 
anthracite  coal,  turpentine,  jute,  augers,  axes,  planes, 
files,  hammers,  door-knobs,  mortise-locks,  chisels, 
building  materials,  linseed-oil,  furniture,  tobacco,  wire 
nails,  petroleum,  cottonseed-oil,  lard,  tallow,  codfish, 
herring,  crackers,  glucose,  barbed  wire,  molasses,  salt, 
and  pig  iron. 

Moreover,  tariffs  and  combinations  affecting  raw 
materials  have  a  pervasive  and  sinuous  influence  on 
the  prices  of  related  and  finished  goods.  Combina- 
tions, or  understandings,  to  control  the  supply  price  of 
coal,  tar,  hides,  zinc,  lead,  copper,  and  other  metals — 
as  well  as  tin-plate,  turpentine,  cotton,  dyes,  and  a 
great  number  of  other  commodities  used  in  further 
manufacture — tend  to  increase  the  expenses  of  pro- 
duction of  a  much  wider  range  of  articles.  In  some 
cases,  of  course,  the  large-scale  production  introduced 
by  combinations  may  enable  the  final  unit  of  product 
to  be  sold  at  a  lower  rate;  but  such  economies  are 
frequently  offset  by  the  higher  cost  of  materials  as 
just  mentioned,  by  the  higher  range  of  wages,  or  by 
other  items  entering  into  the  expenses  of  production. 

Combinations,  therefore,  have  had  an  influence  on 
the  prices  of  so  many  articles  as  to  give  an  impression 
of  a  general  cause;  but  it  is  one  quite  independent  of 
the  demand  for  and  the  supply  of  gold. 

§  3.  Moreover,  rising  prices  due  to  high  expenses 
of  production,  or  to  combinations  of  sellers,  present  a 
paradise  for  speculation  (Part  I,  b,  6).    A  movement 


i3o  MONEY  AND  PRICES 

upward  based  on  facts  can  be  easily  converted  into  a 
further  rise  based  only  on  speculative  manipulation. 
A  rise  of  prices  which  brings  large  profits  to  a  combina- 
tion thus  directly  affects  earnings  and  gives  especial 
opportunity  to  speculation  in  the  securities  of  indus- 
trials. Hence,  the  field  of  speculation  spreads  from 
commodities  (Part  I)  to  securities  (Part  II).  The 
facts  as  to  the  movement  of  prices  of  securities  are 
well  shown  in  collections  of  economic  charts1  since 
1885;  and,  while  the  presence  of  gold  serves  as  a  fund 
of  lawful  money  in  reserves,  the  spread  of  speculation 
has  gone  on  seemingly  unaffected  by  the  new  supplies 
of  gold.  That  is,  speculative  conditions  may  arise 
and  disappear  antecedent  to  and  seemingly  indepen- 
dent of  the  gold  supplies. 

It  is  clear  that  a  sudden  and  extreme  change  of  prices 
was  caused  by  the  crisis  of  1893.  There  had  been  an 
expansion  of  demand  based  on  fictitious  assets.  When 
the  bubble  was  pricked,  the  supply  of  goods  in  general 
was  in  excess  of  legitimate  demand,  and  prices  fell. 
The  lowest  point  of  depression  was  in  1896,  the  year 
when  liquidation  had  about  reached  its  end.  A  part 
of  the  sudden  rise  of  prices  since  1896  is  obviously  due 
to  the  inevitable  reaction  from  the  effects  of  liquida- 
tion and  to  a  return  to  normal  conditions  of  credit 
and  exchange.  The  recovery  from  speculative  con- 
ditions and  consequent  depression  soon  brought  the 
level  of  prices  back  to  about  that  of  1890,  before  the 

1  E.g.,  Brookmire's. 


RETAIL  PRICES  131 

Baring  failure  in  London  (due  to  conditions  in  Argen- 
tina). There  exists,  therefore,  the  possibility  of  a 
great  change  in  prices  due  directly  to  overtrading  and 
an  unsound  expansion  of  credit,  which  has  no  causal 
connection  with  the  existing  stock  of  gold. 

§  4.  We  must  remember,  however,  that  the  above 
conclusions  have  been  based  on  an  examination  of 
wholesale  prices.  Yet  the  family  buys  at  retail;  and 
the  forces  bearing  on  the  level  of  retail  prices  have  a 
direct  effect  on  the  actual  cost  of  living.  Yet  if  the 
truth  must  be  told,  there  are  no  reliable  retail  prices. 
They  vary  with  the  buyer's  social  position,  the  quar- 
ter of  the  city,  the  season,  very  often  with  the  under- 
standings and  agreements  between  the  wholesale  and 
retail  dealers,  and  those  between  the  retail  dealers 
themselves.  In  fact,  one  of  the  strongest  holds  the 
so-called  trusts  have  upon  prices  is  to  be  found  in  the 
agreements  with  the  retailers  to  sell  at  a  fixed  price. 
Even  the  evolution  of  the  cold-storage  warehouses — 
like  the  use  of  certificates  for  wheat  in  elevators — has 
come  to  permit  speculation,  agreements,  and  the  con- 
trol of  the  supply,  as  in  the  case  of  eggs,  poultry,  fish, 
apples,  and  the  like. 

There  can  be  little  doubt  that  the  retail  organiza- 
tion by  which  goods  go  from  the  wholesaler  to  the  con- 
sumer is  needlessly  wasteful  and  expensive.  There 
are  a  score  of  butchers'  shops  and  groceries  in  a  neigh- 
borhood  where   only   one   is  necessary.     Each   must 


i32  MONEY  AND  PRICES 

spend  in  advertising,  in  show-windows,  in  rents,  in 
costly  fixtures,  in  telephones,  in  wages,  in  horses  and 
delivery  cars  much  that  is  not  essential  to  the  total 
business  done.  Five  or  six  wagons  or  cars,  with  sal- 
aried drivers,  distribute  trifling  quantities  of  goods  to 
houses  in  the  same  street.  The  consumer  pays  for 
this  waste  in  the  margin  of  retail  over  wholesale  prices. 
From  1890  to  1908  on  an  average  wholesale  prices  had 
increased  9  per  cent.,  while  retail  prices  had  increased 
18  per  cent.  The  difference  between  wholesale  and 
retail  prices,  in  particular  cases,  varies  from  10-25 
per  cent,  to  100-150  per  cent. 

If  one  stops  to  analyze  the  process  of  retail  buying, 
it  will  be  realized  that  it  is  the  seller  who  practically 
sets  the  price.  There  is  no  true  competitive  retail 
price.  Busy  or  ignorant  people  pay  what  is  charged 
them  without  the  patience  or  the  power  to  select.  In 
these  days  we  pay  for  the  additional  costs  of  dainty 
and  attractive  packages  containing  cereals,  crackers, 
figs,  and  the  like.  Indeed,  under  the  cover  of  special 
tins,  an  amount  of  an  article  is  sold  at  a  price  which 
makes  a  pound  cost  two  or  three  times  as  much  as 
formerly.  The  psychology  of  the  retail  market  is  it- 
self a  study  of  no  mean  interest.  Habit,  fancy,  caprice, 
rumor,  emulation,  gregarious  action  of  a  set,  may  play 
a  part.  Once  a  man  gets  established  with  a  clientele, 
he  puts  up  his  prices.  He  charges  all  he  can  get;  and 
the  confiding  customer  goes  on  paying  the  bills — until 
there  rises  a  general  cry  of  high  cost  of  living,  like  that 


CO-OPERATION  AS  A  REMEDY  133 

of  recent  years.  There  are  different  retail  prices  for 
each  half-mile  as  one  passes  from  the  centre  of  a  city 
to  its  outskirts.  Yet  some  persons  think  it  demean- 
ing to  bargain  or  seek  for  lower  prices.  To  spend  reck- 
lessly is  an  evidence  of  what  some  regard  as  belonging 
to  social  position. 

In  the  margin  of  the  retail  over  the  wholesale  price, 
in  a  community  not  well  shaken  down  into  form,  there 
is  an  opportunity  for  serious  changes  in  the  cost  of 
living.  Out  of  this  margin,  the  catalogue  houses,  the 
wholesale  grocery  houses,  the  tea  and  coffee  houses 
have  accumulated  great  fortunes — at  the  expense  of 
the  helpless  consumer.  Then,  what  is  the  remedy? 
Obviously,  the  creation  in  every  neighborhood  of  co- 
operative societies  for  the  distribution  of  goods  directly 
from  the  producer  to  the  consumer  at  actual  cost — 
obviating  the  waste  of  advertising,  high  rents,  and  use- 
less duplication  of  service.  It  calls  for  social  organiza- 
tion :  a  thing,  of  course,  which  is  always  slow  of  devel- 
opment because  the  Almighty  made  every  man  an 
individualist,  who  wishes  each  thing  done  to  suit  his 
individual  tastes,  and  at  the  time  and  place  to  suit 
his  pleasure.  If  co-operation  succeeds,  however,  it 
will  remove  the  wide  margin  of  differential  gains,  which, 
lying  above  the  actual  expenses  of  production,  afford 
an  opportunity  for  combination  and  for  manipulation 
to  control  prices.  It  may  be  said  that  the  manufac- 
turers and  producers  will  refuse  to  sell  to  the  co- 
operative  societies   under   threats   from   the   present 


i34  MONEY  AND  PRICES 

large  body  of  retailers;  but  in  the  long  run  producers 
will  arise  wherever  there  is  a  sustained  demand.  And 
the  success  of  distributive  co-operation  in  England, 
where  the  societies  buy  largely  from  outside  producers, 
is  one  of  the  reasons  for  the  lower  expenses  of  living 
in  England  than  in  America — apart  from  the  fact  that 
good,  warm,  woollen  clothing  is  there  no  more  than 
one-half  what  it  is  here. 

§  5.  Furthermore  (Part  I,  b,  4),  we  must  face  the 
fact  of  increasing  riches  not  only  in  this  country,  but 
all  over  the  world.  New  wealth  makes  a  liberal 
spender.  The  retail  dealer,  finding  his  expenses  in- 
creasing— and  even  when  they  are  not — tries  the  ex- 
periment of  charging  his  richer  customers  an  increasing 
price.  The  newly  rich  pay  and  do  not  feel  it.  It 
must  be  admitted  that,  aside  from  the  higher  prices  of 
many  staple  articles,  our  standard  of  living  has  changed 
with  the  growing  wealth  of  the  country.  Each  family 
now  wishes  more  expensive  food,  better  clothes,  more 
costly  millinery,  more  pictures  and  books — and  those 
of  a  higher  price — more  bicycles  and  automobiles,  more 
horseback  riding,  more  travelling,  stays  at  higher- 
priced  hotels,  passage  on  more  expensive  steamers, 
than  formerly — all  to  keep  up  in  the  procession  with 
the  successful  rich,  who  are  increasing  enormously  in 
numbers.  Every  one  expects,  as  a  matter  of  course, 
to  buy  fruits  and  vegetables  out  of  season — such  as  a 
very  short  time  ago  were  considered  within  the  reach 


COST  OF  LIVING  AND  NEW  GOLD        135 

of  only  the  largest  purses.  Our  kitchen  economy  is 
quite  too  wasteful;  we  throw  away  fats  and  buy  lard 
to  take  their  place.  But  what  can  the  poorer  unor- 
ganized buyer  do  when  retail  prices  are  raised  ?  What 
can  he  do  if  his  meat  bill,  or  his  plumbing-repairs  bill, 
rises  enormously?  The  extravagance  of  the  rich  has 
generally  raised  the  standard  of  expenditure.  Those 
of  smaller  income  find  they  also  must  pay  the  higher 
prices.  Thus  we  have  reached  a  point  where  we  have 
to  pay  almost  whatever  any  one  asks.  Organized  buy- 
ers are  the  only  offset  to  organized  sellers. 

§  6.  In  conclusion,  we  find  that  under  the  same 
general  forces — although  acting  in  different  combina- 
tions at  different  times— we  have  had  falling  prices 
before,  and  rising  prices  since,  1896.  It  may  be  said 
that  new  gold  increased  bank  reserves,  made  possible 
enlarged  credits,  and  so  worked  for  higher  prices;  but 
this  influence  must  have  been  as  active  in  the  earlier 
as  in  the  later  period.  Therefore,  even  if  we  should 
admit  that  the  flood  of  new  gold  has  finally  begun  to 
lift  somewhat  the  level  of  prices,  it  could  not  be  the 
cause  of  the  changes  which  have  to-day  so  thoroughly 
aroused  public  attention.  The  rise  of  prices  now  most 
discussed,  such  as  those  of  farm  and  food  products, 
is  due  to  special  causes,  and  not  to  gold.  Part  of  the 
sudden  rise  of  prices  since  1896  is  obviously  due  to  the 
reaction  from  a  time  of  depression;  but  the  period 
since  1897  is  one  in  which  business  organization  has 


136  MONEY  AND  PRICES 

in  the  main  taken  on  new  form,  and  in  which"  prices 
have  been  under  powerful  control.  Moreover,  special 
causes,  such  as  high  tariffs,  agricultural  readjustment, 
higher  wages,  and  increasing  expenditures  of  the  rich 
have  operated  to  raise  prices.  The  resultant  seems  to 
be  the  outcome  of  special  forces  on  the  goods  side  of 
the  price  ratio  working  to  raise  the  prices  of  goods, 
more  than  inventions  and  progress  in  the  arts  have 
been  able  to  depress  them.  In  this  respect  the  later 
differs  from  the  earlier  period.  Gold,  in  the  sense  of 
riches,  may  be  the  root  of  all  evil;  but  gold,  in  the 
sense  of  a  standard  of  prices,  cannot  be  the  sole  root 
of  the  evil  in  our  increased  cost  of  living. 


CHART  VI 


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CHAPTER  V 
THE  EUROPEAN   WAR   AND   INFLATION 

§  i.  As  used  in  popular  discussion,  there  is  very 
great  ambiguity  as  to  the  meaning  of  the  word  "infla- 
tion." It  may  refer  only  to  the  quantity  and  char- 
acter of  the  circulating  medium  or  it  may  be  used  to 
cover  an  expansion  of  credit  by  banks  or  by  the  gov- 
ernment. In  either  case  it  is  frequently  assumed  to 
have  a  necessary  connection  with  the  general  level  of 
prices.  For  the  sake  of  clearness  we  may  first  confine 
ourselves  to  the  subject  of  the  currency. 

In  the  past  it  has  been  generally  accepted  that  a 
convertible  paper  money  cannot  depreciate  below  the 
exchange  value  of  the  precious  metal  into  which  it  is 
convertible.  There  are  those,  however,  who  believe 
that  the  very  increase  itself  in  the  quantity  of  money 
(whether  convertible  or  not),  whether  gold  or  paper, 
may  cause  a  rise  of  prices — which  is  the  same  thing  as 
saying  that  the  money  has  depreciated  relatively  to 
goods.  This  point  of  view  is  the  old  one  of  the  time 
of  Lord  Overstone  in  England,  and  of  Amasa  Walker 
in  this  country.1    Recently,  this  position  has  been  as- 

1Cf.  Laughlin,  Principles  of  Money,  pp.  260,  268.  Modern  theorists 
might  well  note  Lord  Overstone's  position:  "It  is  not  unnatural  that  a 
tendency  should  arise  to  conclude  with  too  much  haste,  .  .  .  that  fluctua- 
tions in  the  amount  of  the  circulation  are  the  immediate  and  only  cause  of 
all  fluctuations,  which  may  occur  in  prices"  (Tracts,  etc.,  ed.  McCulloch, 
1857,  p.  205). 

137 


138  MONEY  AND  PRICES 

sumed  by  Irving  Fisher,  an  extreme  follower  of  the 
quantity  theory  of  money,  and  a  theorist  of  the  mathe- 
matical school.  He  claims  that  the  events  of  the  Eu- 
ropean War  have  already  (19 18)  disproved  the  prin- 
ciple that  convertible  paper  cannot  depreciate  below 
its  metallic  base.  The  facts  as  to  an  increase  of  the 
circulation  in  various  countries  are  cited,  then  atten- 
tion is  called  to  the  well-known  rise  of  war  prices,  it 
being  taken  for  granted  that  the  rise  of  prices  is  due 
to  the  increase  of  the  circulation. 

However  this  may  be,  inflation  of  the  currency  has 
been  usually  regarded  as  the  consequence  of  such  an 
increase  in  the  quantity  of  a  country's  money  as  has 
caused  its  depreciation.  (1)  If  this  depreciation  is 
relatively  to  gold,  then  something  like  inconvertibility 
must  have  broken  the  nexus  between  gold  and  the 
paper  money.  This  has  happened  in  Germany,  which 
consciously  decided  to  carry  through  the  war  on  in- 
convertible paper.  Not  being  convertible  into  gold, 
there  has  been  no  regulator  of  the  value  of  the  paper 
mark,  and  Germany  is  now  reaping  the  whirlwind 
from  her  own  sowing.  (2)  But  if,  as  in  this  country, 
all  forms  of  the  circulation  have  been  kept  inter- 
changeable with  gold,  then  all  considerations  as  to 
inconvertibility  may  be  dropped  from  our  discussion. 
If  there  has  been  a  rise  of  prices,  it  cannot  be  charged 
to  a  depreciation  of  the  currency  relatively  to  gold. 
Yet  it  is  very  often  said  that  there  has  been  inflation 
in  the  United  States. 


QUANTITY  OF  CIRCULATION  139 

§  2.  The  issue,  then,  is  clearly  joined.  Has  there 
been  a  rise  of  prices  since  the  war  began  and  is  this 
rise  to  be  attributed  to  an  inflation  of  our  money, 
which  all  the  while  has  been  kept  at  par  with  gold? 
As  to  the  rise  of  prices  of  certain  classes  of  commodi- 
ties there  is  no  question ;  but  as  to  the  cause  of  the  rise 
there  is  very  much  of  a  question.  Also,  as  to  an  in- 
crease in  the  quantity  of  our  circulation  there  is  no 
doubt.  Our  increased  supply  of  gold  through  imports 
has  been  phenomenal,  thereby  providing  a  solid  base 
for  the  maintenance  of  our  gold  standard,  even  in  the 
trying  times  of  a  great  war.  The  gold  reserves  of  the 
Federal  Reserve  banks  have  doubled  within  the  last 
year.  In  addition,  there  has  been  a  fourfold  increase 
within  a  year  in  the  Federal  Reserve  notes  in  circula- 
tion. 

When  we  come  to  examine  the  causes  for  the  rise 
which  has  occurred  in  the  prices  of  goods  since  the 
war  began,  we  find  very  little  ground  for  assuming 
that  it  has  been  due  to  inflation,  that  is,  to  an  expan- 
sion of  the  quantity  of  our  money  convertible  into  gold. 
Those  who  start  out  with  the  unscientific  assumption 
that  because  of  an  increase  of  the  money  in  circulation 
there  must,  as  a  consequence,  necessarily  have  been  a 
rise  of  prices,  must  be  ruled  out  of  court.  To  make 
such  a  claim  is  to  grant  the  thing  to  be  proved. 
Should  there  be  a  number  of  active  causes  working  to 
raise  the  prices  of  many  commodities — especially  those 
demanded  for  war  purposes — which  are  wholly  inde- 


i4o  MONEY  AND  PRICES 

pendent  of  the  changes  in  the  amount  of  our  money, 
then  it  does  not  at  all  follow  that  our  higher  range  of 
prices  can  be  attributed  to  inflation. 

Those  who  argue  directly  from  an  increase  of  the 
circulation  to  a  rise  of  prices  seem  to  ignore  a  whole  set 
of  causes  affecting  prices  of  goods  which  are  well  known 
to  business  men,  and  which  are  yet  in  no  way  connected 
with  the  circulation.  The  economic  theorists  who 
find  prices  are  affected  directly  by  the  quantity  of 
money — or  the  demand  for  money  as  compared  with 
its  supply — have  no  place  in  their  philosophy  for  such 
a  cause  of  rising  prices  as  an  increase  of  wages  for  the 
same — or  less — labor  effort.  To  be  oblivious  to  the 
effect  of  higher  wages  on  the  expenses  of  producing 
goods  and  hence  on  their  prices,  must  seem  almost 
incredible  to  the  practical  men  of  affairs  who  are  to-day 
managing  our  industries.  If  there  is  any  one  thing  of 
common  observation  which  needs  no  proof  it  is  the 
fact  of  a  sharp  rise  of  wages  for  all  kinds  of  labor  in 
every  part  of  the  country  unaccompanied  by  a  corre- 
sponding increase  of  effort  in  time  or  efficiency.  Is  it 
possible  that  any  one  denies  that  an  increase  of  wages, 
other  things  being  equal,  raises  the  selling  prices  of 
goods  ?  Any  one  not  blinded  by  a  preconceived  theory 
can  see  examples  every  day  that  such  is  the  case;  and 
yet  the  abstract  theorists  go  on  saying  that  prices  are 
affected  only  by  forces  working  on  the  supply  of  and 
demand  for  money.  It  is  little  wonder  that  such 
economists  are  distrusted  by  practical  business  men. 


COST  OF  LIVING  AND  HIGHER  PRICES    141 

§  3.  In  trying  to  see  how  much  the  actual  rise  of 
prices  during  the  war  has  affected  the  cost  of  living, 
we  should  examine  the  movement  of  retail  prices. 
Wholesale  prices  cannot  be  used  in  working  out  the 
effect  of  changes  in  the  family  budget.  In  a  working 
man's  budget  the  rise  of  prices  from  July,  1914,  to 
November,  1918,  showed  the  following  effect  on  the 
cost  of  living:1 


Budget  items 

Relative 
importance  in 
family  budget 

Increase  in 

prices  during 

war  period 

Increase  as 

related  to 

total  budget 

All  items 
Food 

100.0% 
43  •  1  % 

83% 

659% 
35-8% 

Shelter 

17-7% 

132% 

5-6% 

20.4% 

20% 
93% 
55% 
55% 

3-5% 
12.3% 

31% 
112% 

Clothing 

Fuel,  heat,  and  light 

Sundries 

Thus  in  the  price  column  it  will  be  seen  that  food 
and  clothing  were  the  items  which  rose  most.  In 
clothing,  woollens  rose  100  per  cent,  and  cottons  from 
87  to  264  per  cent. 

In  studying  the  causes  of  this  rise  of  prices,  es- 
pecially as  regards  food  and  clothing,  scarcity  condi- 
tions, as  well  as  higher  wages,  were  obviously  at  work. 
The  supply  of  hides  and  leather,  for  instance,  became 
so  reduced  that  they  came  to  have  a  scarcity  value. 
The  effect  has  been  to  raise  the  prices  of  shoes  76  per 

1  From  Wartime  Increases  in  the  Cost  of  Living,  issued  by  the  National 
Industrial  Conference  Board,  Boston,  Mass.,  February,  1919. 


142  MONEY  AND  PRICES 

cent.;  since  the  increased  demand  for  soldiers'  equip- 
ment has  operated  on  a  reduced  supply.  The  with- 
drawal of  men  from  the  farms  has  produced  a  scarcity  of 
food  in  all  countries  directly  engaged  in  the  war.  Hence 
the  extraordinary  rise  in  the  prices  of  wheat,  corn,  oats, 
and  all  breadstuffs.  Materials  needed  in  shipbuilding, 
in  the  manufacture  of  munitions  of  war,  lumber,  steel, 
copper,  manganese,  and  the  like,  have  been  obviously 
raised  in  price  because  of  the  war  demands.  It  is  not 
necessary  to  extend  the  list  of  materials  whose  prices 
have  patently  risen  for  special  reasons  having  nothing 
whatever  to  do  with  the  quantity  of  our  circulation. 

Moreover,  all  ocean  freights  have  risen  prodigiously, 
and  thus  increased  the  costs  of  all  imported  material 
and  food  products.  The  cases  are  legion  where  vessels 
have  been  furbished  up  and  have  almost  paid  for  them- 
selves on  one  voyage  because  of  unheard-of  charges 
for  freight.  Could  any  one  in  his  senses  suppose  for 
a  moment  that  scarcity  of  shipping  and  high  rates  of 
transportation  were  due  to  an  abundance  of  money 
in  circulation  ?  Sudden  and  unexpected  war  demands 
for  goods  and  ships  have  come  simultaneously  with  a 
diminished  production.  Why  charge  up  to  the  cir- 
culation what  is  traceable  to  the  submarine?  Ab- 
stract theory  can  easily  be  pushed  too  far. 

All  this  exposition  goes  to  show  that  the  view  that 
our  higher  prices  are  due  to  an  inflation  of  our  money 
is  not  supported  by  sound  reasoning.  The  price  of 
a  pair  of  shoes  is  the  quantity  of  gold  for  which  it  will 


PRICES  IN  BELLIGERENT  COUNTRIES     143 

exchange.  If  the  expenses  of  making  shoes  increase, 
the  quantity  of  gold  required  to  buy  the  shoes  increases. 
The  cause  of  this  rise  lies  in  conditions  affecting  the 
shoes,  not  in  those  affecting  gold.  The  insufficiency 
of  the  quantity  theory  of  money  lies  in  its  inability  to 
account  for  important  forces  working  on  the  prices 
of  commodities  through  the  commodities  themselves. 
If,  then,  this  method  of  reasoning  is  faulty,  it  is  im- 
proper to  claim  that  our  higher  level  of  prices  is  due 
to  inflation. 

§  4.  It  may  be  said,  however,  that  higher  prices 
have  appeared  in  all  the  belligerent  countries,  and  that 
it  is  in  these  very  countries  where  the  quantity  of 
money  has  been  vastly  increased.  In  fact,  it  will  be 
found  that,  except  in  England,  European  nations  have 
left  the  gold  standard  and  that  their  depreciated  paper 
would  in  itself  bring  in  pro  tanto  higher  prices.  It  is 
not  so  with  us.  Such  increase  of  our  money  as  has 
taken  place  has  been  almost  wholly  in  gold  or  in  Fed- 
eral Reserve  notes  largely  supported  by  gold.  This 
gold  has  come  to  us  mainly  from  Great  Britain.  If  the 
coming  of  this  gold  has  been  the  cause  of  high  prices 
in  the  United  States,  then  the  loss  of  it  to  Great  Britain 
should  have  lowered  prices  there. 

Unfortunately  for  this  sort  of  theorizing,  British 
prices  have  risen  more  than  100  per  cent.  The  change 
in  the  level  of  British  and  American  prices  is  shown  in 
Chart  V.    To  the  practical  mind  it  becomes  perfectly 


i44  MONEY  AND  PRICES 

clear  that  higher  prices  in  Great  Britain  and  the  United 
States  are  to  be  attributed,  not  to  the  going  or  coming 
of  gold,  but  to  war  conditions  which  have  brought 
scarcity  and  higher  expenses  of  production  of  goods. 
Such  forces  have,  undoubtedly,  been  working  in  Ger- 
many and  France,  in  addition  to  those  arising  from  the 
depreciation  of  their  paper  relatively  to  gold. 

It  is  a  mistake  to  generalize  from  the  experience 
of  Continental  countries  to  conclusions  in  the  United 
States.  Attempts  have  been  made  to  collect  the  data 
for  increased  paper  issues  in  Europe  and  thereby  to 
explain  the  higher  prices  as  a  result  of  expansion.  In 
truth,  expansion  in  Europe  has  followed  inconverti- 
bility in  gold,  and,  therefore,  depreciation  has  been 
accelerated  by  increasing  issues.  There  is  no  such 
situation  in  this  country.  Our  prices  are  gold  prices. 
It  has  been  a  tremendous — sometimes,  perhaps,  an  un- 
appreciated— advantage  to  have  had  this  great  influx 
of  gold.  It  is  our  rare  good  fortune  to  stand  solidly 
on  a  gold  standard,  and  to  be  saved  from  the  ruinous 
losses  of  a  fluctuating  paper  standard  while  engaged  in 
the  greatest  war  of  all  history. 

So  long  as  our  prices  are  gold  prices  their  changes 
will  be  due  to  inevitable  natural  causes,  which  will 
adjust  themselves  automatically  in  the  transition 
period  after  the  end  of  the  war.  If  this  is  inflation, 
let  us  have  more  of  it. 

§  5.  The  fear  of  inflation,  as  recently  presented, 
seems  to  have  its  support  mainly  in  a  supposed  expan- 


EXPANSION  OF  BANK  CREDIT  145 

sion  of  banking  credit.  Here  also  the  evidence  of  the 
existence  of  inflation  is  assumed  to  be  a  rise  of  prices. 
Hence,  if  it  is  impossible  to  show  a  strictly  monetary 
inflation  as  a  cause  of  rising  prices,  it  is  claimed  that 
such  a  rise  must  have  been  due  to  an  inflation  of  credit. 
To  those  unaccustomed  to  think  in  the  fundamentals  of 
credit,  this  theory  is  likely  to  be  much  the  more  plausi- 
ble. In  this  point  of  view  the  test  of  inflation  is  a 
rise  of  prices.  As  we  proceed  in  our  discussion  it  will 
be  clear  that  a  wrong  test  of  banking  inflation  has  thus 
been  applied.  Even  at  the  risk  of  repetition  certain 
points  should  be  here  again  emphasized. 

In  its  most  familiar  form  the  theory  of  an  inflation 
of  credit  resulting  in  higher  prices  is  as  follows:  We 
have  had  a  very  great  addition  to  our  stock  of  gold. 
If  this  gold  goes  into  our  bank  reserves,  it  will  enlarge 
the  power  of  the  banks  to  extend  credit.  Hence,  those 
who  have  larger  credits  granted  them  will  have  larger 
purchasing  power,  a  greater  demand  for  goods,  causing 
thus  a  general  rise  of  prices  through  an  expansion  of 
credit. 

In  this  way  of  thinking  there  are  two  fundamental 
errors.  In  the  first  place,  there  is  the  same  error  in 
regard  to  credit  that  there  was  shown  to  be  in  regard 
to  the  circulation.  It  is  quite  one-sided  to  reason  from 
a  rise  of  prices  to  an  inflation  of  credit,  because  it  is 
wholly  inadequate  to  argue  that  prices  are  fixed  only 
by  purchasing  power.  Demand  has  an  effect  on  prices, 
it  is  true,  but  so  have  supply  and  changing  expenses 
of  production  of  goods.     The  utility  of  a  hammer  is 


i46  MONEY  AND  PRICES 

very  great,  but  a  millionaire  does  not  pay  more  for  it 
than  a  price  corresponding  to  its  expenses  of  produc- 
tion. 

Thus  there  are  factors  touching  prices  of  far  greater 
practical  importance  than  the  purchasing  power,  or 
demand  created  by  credit.  Attempts  of  a  theoretical 
character  have  been  made  to  show  by  statistics  a  corre- 
spondence between  the  volume  of  money  and  credit 
on  the  one  hand  and  changes  in  prices  on  the  other. 
To  compare  only  the  statistics  of  money  and  credit 
with  the  movement  of  prices  is  assuming  the  validity  of 
the  very  theory  which  it  is  attempted  to  establish.  If 
one  were  trying  to  find  the  causes  of  the  change  of 
prices  statistically,  then  let  there  be  included  in  the  in- 
vestigation all  the  data  about  labor,  wages,  efficiency, 
costs  of  materials,  freights,  skill  of  management,  ma- 
chinery, new  processes,  taxation,  insurance,  and  the 
like  which  enter  into  the  expenses  of  producing  every 
known  commodity.  The  causes  affecting  prices  are 
too  numerous  to  have  them  set  aside  for  a  single 
factor  such  as  the  expansion  of  money  or  credit. 

§  6.  The  second  error  resides  in  a  misunderstand- 
ing of  the  relation  of  bank  reserves  to  loans.  It  is 
true  that  when  a  loan  is  granted  the  bank  creates  a 
deposit  liability  on  which  the  borrower  can  draw;  and 
a  certain  percentage  of  reserves  to  these  demand  lia- 
bilities, based  on  experience  or  law,  must  be  kept. 
That,  however,  is  not  all  of  the  matter.    On  what  does 


BANK  RESERVES  AND  LOANS  147 

the  lending  power  of  a  bank  depend?  Not  on  its  re- 
serves at  the  moment,  but  on  the  character  of  its  as- 
sets. If  the  bank  has  liquid  commercial  assets  in  its 
loan  item  it  can,  through  rediscounts  at  its  Federal 
Reserve  bank,  increase  its  reserves  at  will.  It  is  not 
true,  therefore,  that  a  bank  is  limited  in  granting  credit 
by  the  amount  of  specie  in  its  reserves.  Likewise  it 
does  not  follow  that,  because  large  imports  of  gold 
have  poured  into  this  country — due  to  exceptional 
exports  of  war  goods  and  food — there  must  be  an  ex- 
pansion of  credit  by  the  banks.  The  error  lies  in  cen- 
tring attention  on  the  specie  reserves  rather  than  on 
the  quality  of  assets.  In  fact,  before  the  floating  of 
our  last  loans  bankers  of  the  highest  standing  said 
there  had  been  no  inflation  of  our  credit. 

Suppose  bank  reserves  increase.  Is  that  a  reason 
why  a  loan  is  made  ?  Not  at  all.  In  legitimate  bank- 
ing a  loan  is  granted  only  if  the  asset  behind  it  is  sound 
and  secures  the  repayment  of  the  loan.  Such  loans 
on  liquid  assets  take  care  of  themselves  and  can  be 
largely  increased  without  risk.  The  greater  the  quan- 
tity of  staple,  salable  goods  produced  and  sold  by  a 
firm,  the  more  credit  it  can  obtain  from  a  bank.  Loans 
are  not  properly  made  because  reserves  are  large,  but 
because  good  assets  are  offered. 

If  an  increasing  amount  of  good  loans  is  offered, 
banks  then  see  to  it  that  reserves  are  kept  up  to  the 
limit  set  by  law  or  experience.  The  true  order  of 
events  is  as  follows :  Transactions  in  goods,  then  loans 


i48  MONEY  AND  PRICES 

based  on  their  movement  and  sale,  and,  finally,  the 
accumulation  of  a  proper  reserve.  As  compared  with 
forty  years  ago,  the  loans  of  our  national  banks  are  at 
least  six  times  as  large  as  then.  Does  that  imply  in- 
flation of  credit  ?  By  no  means.  It  indicates  that  the 
production  and  exchange  of  goods  has  increased  many- 
fold  in  our  country  and  that  a  correspondingly  increased 
basis  exists  for  sound  credit  at  the  banks. 

This  brings  us  to  see  very  clearly  that  the  test  as 
to  whether  inflation  of  credit  exists  or  not  is  to  be  found 
in  the  quality  of  assets  accepted  for  the  security  of  loans 
at  our  banks.  In  proportion  as  staple  goods  are  pro- 
duced and  sold  and  loans  thereby  asked,  credit  can  be 
extended  without  any  question  as  to  inflation.  When 
loans  are  granted  on  assets  that  are  not  liquid,  that 
have  no  immediate  price  in  the  market,  that  cannot 
be  realized  on  to  pay  off  the  loan  at  maturity  without 
loss,  to  that  extent  there  has  been  inflation  of  credit. 
Such  a  test  is  a  radically  different  one  from  that  pro- 
posed by  the  theorists  who  find  it  in  a  rise  of  prices. 
They  hold  that  an  increase  of  credit  increases  pur- 
chasing power  or  demand,  and  thus  raises  prices.  But 
I  have  already  explained  that  supply  or  expenses  of  pro- 
duction of  goods  also  affect  prices.  To  talk  only  of 
demand  or  purchasing  power  is  one-sided  and  inade- 
quate. 

No  matter  how  large  the  increase  in  the  production 
of  goods,  the  increase  in  credit  can  go  on  pro  tanto 
without  affecting  prices.     By  presenting  a  claim  on 


WAR  FINANCE  CORPORATION  149 

goods  as  the  basis  for  a  loan  a  borrower  gets  these 
goods  coined  into  a  means  of  payment  by  a  credit  at 
a  bank  on  which  he  can  draw.  By  extending  such 
operations  to  most  marketable  goods  one  man's  pur- 
chasing power  is  offset  against  the  purchasing  power  of 
another,  and  thus  balanced  all  around;  so  that  there 
is  no  reason  for  a  rise  of  prices  due  to  this  process  of 
balancing  payments  by  bank  credits  and  checks. 

§  7.  In  the  time  of  war,  however,  there  was  an 
obvious  demand  for  credit  in  those  industries  providing 
munitions  of  war.  Just  as  more  goods  are  produced 
than  before  the  war  there  may  be  a  new  demand  for 
credit,  but  if  the  new  goods  are  sold  and  soon  paid 
for  the  assets  are  liquid,  and  there  is  no  inflation  of 
credit.  It  is  seen,  of  course,  that  more  means  of  pay- 
ment were  called  for  in  these  war  industries — and  high 
war  prices  made  the  figures  of  the  same  quantity  of 
goods  "mount  higher  in  accounts.  But  such  a  con- 
sequence did  not  necessarily  require  more  forms  of 
money  in  circulation,  except  perhaps  for  pay-rolls  on 
higher  wage  scales.  It  depends  on  the  business  habits 
of  the  community  whether  accounts  are  settled  by 
checks  drawn  on  banks  or  by  passing  actual  money 
from  hand  to  hand.  If,  as  is  the  custom  with  us, 
the  proceeds  from  the  loan  are  retained  on  deposit 
and  only  checks  used,  then  the  fabric  of  credit  will  in- 
crease just  in  proportion  to  the  increased  work  to  be 
done.     And  our  stock  of  gold  is  so  abundant  that  there 


150  MONEY  AND  PRICES 

can  be  no  trouble  in  finding  the  required  reserves. 
The  only  question  is  as  to  the  quality  of  the  assets. 

But  the  conditions  arising  out  of  the  war  created  a 
desire  for  some  new  form  of  credit  institutions  which 
would  grant  aid  to  industries  engaged  in  supplying 
the  government  with  munitions,  ships,  transportation, 
and  supplies.  Hence  came  the  passage  of  an  act 
creating  the  War  Finance  Corporation.  In  regard  to 
this  institution  more  or  less  fear  had  been  expressed 
that  it  might  lead  to  inflation.  This  result  could 
happen  only  if  its  loans  created  demand  liabilities 
supported  by  unliquid  assets. 

The  corporation  was  expected  to  supply  a  need,  not 
furnished  by  the  Federal  Reserve  banks,  for  loans  not 
supported  by  commercial  assets,  but  by  bonds  and 
various  kinds  of  securities.  Evidently  these  assets 
differed  in  kind  from  those  acceptable  at  a  Federal  Re- 
serve bank.  For  these  loans  the  corporation  issued  a 
liability  in  the  form  of  a  bond  running  from  one  to  five 
years.  The  obvious  danger  lay  in  the  kind  of  assets 
accepted.  It  looked  on  its  face  like  a  lowering  of  the 
standard  of  credit,  somewhat  after  the  fashion  of  the 
Darlehnskassen  in  Germany,  which  have  relieved  the 
Reichsbank  of  loans  on  securities  of  a  certain  kind. 
But  to  give  these  bonds  of  the  corporation  indirectly 
the  advantage  of  cash  to  borrowers  they  were  (by  a  vio- 
lation of  the  original  principle  of  the  Federal  Reserve 
Act)  made  by  law  equal  to  eligible  commercial  paper, 
when  paper  secured  by  these  bonds  was  presented  by 


LOANS  AND  LIBERTY  BONDS  151 

member  banks  for  rediscount  at  a  reserve  bank.  Here 
was  a  possibility  of  inflation;  and  much  depended  upon 
the  judgment  of  the  directors  of  the  corporation  in 
accepting  these  assets.  These  long-time  assets  should 
not  have  been  mixed  up  with  the  legitimate  short-time 
paper  of  the  Federal  Reserve  system.  For  thus  there 
might  be  an  issue  of  notes  not  based  on  liquid  assets. 

§  8.  Finally,  much  has  been  said  of  inflation  due  to 
loans  granted  by  banks  to  pay  for  liberty  bonds. 
Loans  to  a  subscriber  who  expects  before  their  ma- 
turity to  dispose  of  goods  or  property  to  pay  for  the 
bonds  are  not  a  form  of  inflation.  Loans,  however, 
based  on  no  likelihood  of  coming  into  the  possession  of 
goods  or  cash  are  clearly  unsound,  and  tend  to  inflation. 
But  in  all  cases  where  the  subscriber  borrows  with  the 
purpose  to  save,  to  reduce  his  consumption  of  goods, 
he  pays  at  the  maturity  of  the  loan  the  equivalent  of 
goods  obtained  by  saving.  This  is  the  best  of  all  the 
uses  of  credit,  and  one  to  which  no  taint  of  inflation 
attaches. 

It  seems  impossible  to  find  any  convincing  evidence 
that  our  credit  has  been  so  expanded  as  to  have  re- 
sulted in  a  rise  of  prices.  There  has  been  a  rise  of 
prices;  but  this  rise  has  been  fully  accounted  for  by 
forces  affecting  the  supply,  or  expenses  of  producing 
goods,  rather  than  by  those  touching  the  demand,  or 
purchasing  power,  offered  for  goods. 


CHAPTER  VI 
CAUSES  OF  AGRICULTURAL  UNREST 

§  i.  Having  stated  the  principles  underlying  the 
fixing  of  prices,  the  general  forces  at  work  in  connec- 
tion therewith,  and  their  concrete  working  in  the  ex- 
planation of  prices  from  1850  to  1918,  we  are  now  in  a 
position  to  study  the  application  of  monetary  prin- 
ciples to  practical  experiments  in  this  and  other  coun- 
tries. One  of  the  most  interesting  of  these  has  been 
the  examination  of  economic  causes  in  the  prices  of 
agricultural  products,  which  has  raised  a  question  as 
to  the  psychology  of  agricultural  unrest. 

A  traveller  following  the  path  of  La  Salle  across  the 
plains  of  the  Illinois  to-day  would  be  struck,  even  on 
the  most  superficial  survey,  by  the  signs  of  agricul- 
tural prosperity.  Broad  farms,  substantial  buildings, 
bursting  cribs,  fields  drained  with  tile,  and  every  evi- 
dence of  good  farming  are  visible.  Some  of  the  orig- 
inal settlers,  moreover,  have  won  their  fortunes,  and 
retired  to  the  neighboring  towns  to  spend  their  years 
of  rest.  It  is  not  uncommon  to  find  men  who  have 
amassed  fortunes  counted  by  hundreds  of  thousands 
of  dollars.  Iowa,  also,  is  certainly  to-day  a  successful 
farming  community.  And  wherever  a  man  of  execu- 
tive ability  and  training  in  farming  has  early  taken  up 

152 


CHICAGO   CONVENTION,  1896  153 

agriculture  upon  a  good  soil,  there  comfort  and  pros- 
perity were  pretty  sure  to  be  found.  But  there  is 
another  side  to  the  picture.  A  fire  lay  somewhere  be- 
low all  the  Populistic  smoke  which  arose  from  the 
granger  agitation  and  rolled  ominously  over  the  skies 
from  Chicago  and  St.  Louis  during  the  campaign  year 
of  1896. 

Behind  the  political  evolutions  of  the  parties  which 
marshalled  themselves  under  the  leadership  of  Mr. 
Bryan  there  have  been  some  forces  at  work  which  it 
may  be  interesting  to  record.  The  fact  that  so  many 
delusions  could  result  in  a  kind  of  political  unity,  and 
could  produce  common  political  action,  itself  demands 
explanation.  In  truth,  the  earnestness  of  great  groups 
of  fanatical  men  in  the  Chicago  convention  of  1896 
had  even  a  touch  of  pathos  about  it,  the  more  that 
they  were  evidently  sincere  and  honest.  They  rep- 
resented, however,  certain  strata  in  our  economic  and 
social  organization.  Throughout  the  newer  States  we 
find  a  widely  spread  class  of  undereducated,  vigorous, 
earnest,  but  narrow  minds.  There  is  little  pliability 
in  their  mental  processes.  Once  the  single-ideaed 
brain  has  been  occupied  by  a  theory,  or  craze,  the  gate 
to  all  other  ideas  is  thereby  closed.  In  a  brain  in- 
capable of  economic  and  judicial  reasoning,  the  one 
idea  now  in  possession  engenders  prejudice,  and  even, 
in  an  emotional  nature,  frenzy.  This  class  of  minds 
may  not  always  have  the  same  craze,  but,  in  its  under- 
educated  way,  it  is  sure  to  have  one  of  some  sort. 


154  MONEY  AND  PRICES 

The  subject  of  the  fanaticism  may  change  in  time,  but 
with  fanaticism  we  must  always  reckon  so  long  as  the 
undereducated  class  exists  and  wields  a  large  political 
power. 

The  honest  but  narrow  mind  is  ever  the  prey  of 
knaves.  The  cheat  plies  his  trade  among  the  untrained 
so  long  as  the  eternal-gullible  maintains  its  seat  in  the 
human  heart.  For  the  thriftless  incapable  there  is 
purposely  framed  a  scheme  to  make  something  out  of 
nothing,  which  often  appeals  to  the  naive  honest  as 
the  cloud  of  fire  by  night  guiding  them  out  of  the  desert. 
Thus  two  general  classes — the  gullibles  and  the  manip- 
ulators— both  hoping  to  acquire  riches  by  legerdemain, 
by  tricks  of  legislation,  come  to  work  together  for  a 
common  aim.  The  honesty  of  the  one  is  the  mask 
for  the  dishonesty  of  the  other;  and  they  are  stimu- 
lated, in  the  attempt  to  rub  the  lamp  of  fortune  for 
the  sake  of  obtaining  sudden  riches  without  the  sweat 
of  the  brow,  by  the  picture,  familiar  to  us  in  the  rapid 
development  of  a  young  country  rich  in  varied  re- 
sources, of  men  of  their  own  undereducated  kind  who 
have  stumbled  upon  great  wealth.  The  man  who  for 
years  has  been  eating  his  bacon  over  a  deposit  of 
petroleum,  coal,  copper,  or  gold,  awakes  some  day  to 
great  wealth,  puts  on  the  fine  linen  of  civilization,  and 
stands  forth  as  the  possibility  of  what  may  at  any 
moment  come  to  every  other  one  of  his  kind.  Cupid- 
ity nudges  the  elbow  of  fanaticism.  While  this  human 
quality  is  not  confined  to  any  particular  part  of  our 


THE   GREENBACK   DELUSION  155 

country,  yet  in  the  newer  States  there  is  an  energetic 
restlessness  in  urging  a  peculiar  nostrum  to  which  the 
older  part  of  the  country  is  a  stranger. 

The  narrow  mind — like  a  popgun  in  which  the  last 
wad  shoots  out  the  first — honestly  holds  to  its  one 
idea,  but  this  idea  is  driven  out  by  any  new  agitation 
strong  enough  to  force  in  another  idea  which  may  dis- 
place the  old.  The  old  greenback  delusion,  following 
the  commercial  crisis  of  1873,  flourished  on  this  same 
mental  quality.  The  optimism  of  the  Western  spirit 
had  created  cities  like  Chicago,  and  it  even  built  the 
palaces  of  the  White  City,  but  in  feeble  intellects  this 
optimism  is  the  spring  to  many  harmful  kinds  of  ac- 
tivity. In  its  expansive  way  it  sees  results  before  they 
have  gone  through  the  formality  of  taking  place.  The 
mere  possibility  of  borrowing  is  itself  almost  the  realiza- 
tion of  brilhant  dreams.  The  possession  of  a  loan  is 
a  ladder  to  the  pinnacle  of  life.  The  return  of  the  loan 
to  the  lender  and  the  way  down  the  ladder  again  find 
no  place  in  the  imagination  of  the  borrower. 

Such  is  the  background  of  my  picture.  We  can  see 
the  characteristics  out  of  which  a  certain  kind  of  re- 
sults will  surely  come.  The  greenback  craze  was  the 
outcome  of  a  depression  following  a  long  period  of  ex- 
traordinary inflation  and  speculation  after  the  Civil 
War.  When  the  bubble  burst,  in  1873,  business  dis- 
asters were  not  confined  to  the  farming  class.  Expan- 
sion of  trade,  inflated  prices,  airy  ventures  of  all  kinds, 
collapsed  and  brought  down  men  of  affairs  in  every 


156  MONEY  AND  PRICES 

occupation  with  pitiless  impartiality.  The  farmer, 
having  taken  a  flyer  for  large  sums  when  all  the  world 
was  booming  with  speculative  schemes  of  develop- 
ment, suddenly  found  himself  prone  on  the  ground, 
with  his  flying-machine  lying  splintered  and  ruined 
beside  him.  But  in  this  fate  he  was  in  company 
with  men  engaged  in  all  branches  of  manufacture  and 
trade.  It  is  in  such  a  soil,  composed  of  the  debris  of 
speculation  and  overtrading,  that  a  crop  of  weedy 
delusions  is  sure  to  grow.  It  is  commonly  known 
that  the  years  succeeding  a  panic  are  the  ones  in  which 
quack  remedies  for  industrial  distress  find  many  gulli- 
ble victims.  Untrained  in  economic  reasoning,  inex- 
perienced in  industrial  history,  untaught  in  penetrat- 
ing into  the  causes  of  commercial  phenomena,  the  un- 
dereducated  man  is  the  prey  to  the  first  nostrum  that 
happens  to  be  offered  him.  His  distress  pinches. 
How  easy  to  believe  the  dogmatic  assertion  that  the 
cause  of  his  distress  is  the  "scarcity  of  money ! "  Why 
not?  He  knows  precious  little  about  the  principles 
of  money.  Why  should  it  not  be  that,  as  well  as  some- 
thing else  of  which  he  knows  equally  little?  It  is  all 
mysterious,  anyway.  He  must  believe  the  statements 
of  the  man  who  first  gets  his  confidence.  Therefore, 
in  times  of  industrial  depression  we  have  always  had 
an  epidemic  of  crazes.  We  know  that  in  many  former 
depressions  the  remedies  proposed  have  had  nothing 
whatever  to  do  with  silver,  which  in  1896  appeared  as 
the  sovereign  cure.    In  1874  it  was  a  greenback  wad 


FARMING  DIFFICULTIES  AFTER   1873     157 

in  the  popgun;  since  then  the  silver  wad  had  driven 
out  the  greenback  wad.  In  both  cases,  from  a  scien- 
tific point  of  view,  it  was  clear  that  industrial  disaster 
was  due  to  trading  beyond  all  reason  and  judgment, 
and  that  the  quantity  of  money  did  not  determine  the 
quantity  of  goods  and  property  in  existence. 

Of  course,  the  farmer  who  has  overtraded,  or  ex- 
panded his  operations  beyond  his  means,  is  affected 
in  a  time  of  commercial  depression  just  as  is  any  one 
else  in  like  conditions.  After  1873  he  probably  found 
himself  in  goodly  company;  but  certain  difficulties 
arising  in  the  eighties  and  continued  into  the  nineties 
seem  to  have  been  limited  to  farming.  It  is  quite 
certain  that  at  that  time  special  conditions  surrounded 
the  farmer  and  placed  him  in  a  peculiar  position — 
conditions  which  were  not  common  to  men  in  other 
industries.  If  a  period  of  overdevelopment,  confined 
almost  entirely  to  agricultural  interests,  was  followed 
by  the  inevitable  reaction,  we  may  expect  to  see  all 
the  evidences  of  distress  in  rural  communities  which 
follow  in  the  wake  of  a  general  commercial  crisis; 
and  we  may  expect  to  find  also  that  nostrum-mongers 
have  come  to  the  fore,  charming  and  deluding  the 
honestly  distressed  farmer  with  the  magic  of  their 
patent  remedies.  It  boots  nothing  that  the  diagnosis 
is  wrong,  or  that  the  medicine  is  unfit ;  the  mind  of  one 
idea,  by  its  nature,  is  hospitable  to  the  first  comer, 
and  prejudice  closes  the  door  to  the  advice  of  the 
trained  physician  who  arrives  later. 


158  MONEY  AND  PRICES 

In  the  genuine  Populistic  programme  silver  played 
but  an  unimportant  role.  For  political  purposes,  it 
was  skilfully  made  the  common  basis  of  action,  in  the 
campaign,  by  different  groups  of  persons.  Yet  it  was 
less  hungrily  demanded  than  inconvertible  paper,  or 
the  subtreasury  scheme,  or  greater  freedom  from  the 
militia,  by  the  mind  of  the  true  Populist.  In  short, 
the  conditions  of  agriculture  have  permitted  the  growth 
of  numerous  crazes,  of  which  silver  is  not  even  the 
tallest  weed  in  the  garden.  Behind  silver  lies  a  whole 
thistle  crop  of  ideas,  with  which  we  must  eventually 
deal.  We  shall  have  to  face  various  schemes  of  redis- 
tribution of  property,  even  after  the  silver  question 
has  gone  to  its  long  home  with  the  greenback.  A 
craze  is  the  inevitable  manifestation  of  an  idea  strongly 
held  by  undereducated  men.  If  it  is  not  the  green- 
back craze  or  the  silver  craze,  it  will  be  some  other.1 

§2.  While  understanding  that  vagaries  are  pro- 
lific in  a  season  of  financial  distress,  the  essence  of  our 
inquiry  is  to  discover  the  causes  which  brought  about 
this  situation  of  hardship.  To  one  who  has  watched 
the  larger  industrial  movements  of  recent  decades  it 
is  clear  that  very  powerful  currents  have  been  set  in 
motion,  the  force  and  direction  of  which  may  be  un- 
known to  the  very  persons  who  are  unconsciously  car- 
ried along  on  their  surface.    In  this  study  it  may  be 

1  For  the  psychology  of  inflation  movements  in  more  detail,  see  M.  S. 
Wildman's  Money  Inflation  in  the  United  States  :  A  Study  in  Social  Pathology 
(1905).  PP-xix,  238.    Putnam's,  New.  York. . 


TRANSPORTATION  159 

possible,  so  to  speak,  to  cast  some  sealed  bottles  into 
the  currents,  and  thereby  record  their  trend  and  force. 

We  were  then  witnessing  in  practical  operation  in 
the  United  States  a  difficult  adjustment  of  the  farm- 
ing industry  under  an  economic  principle  as  old  as 
Ricardo.  If  only  for  geographical  reasons,  the  new- 
comers to  an  unsettled  country  originally  plant  them- 
selves upon  the  soil  most  conveniently  situated  to 
harbors  and  rivers,  irrespective  of  the  fact  that  soil 
much  richer  and  more  fertile  lies  in  the  interior.  The 
poorer  soil  accessible  to  transportation  is,  in  fact,  the 
richer  soil  to  the  settler,  who  is  saved  the  sacrifices  of 
a  location  distant  from  the  market.  So  long  as  water 
furnished  the  arteries  of  transportation  and  trade, 
settlements  were  placed  upon  seacoasts  and  rivers. 
Rich  farming  communities  spread  over  the  outlying 
districts  adjacent  to  these  settlements.  The  thin  soil 
of  New  England  once  masqueraded  in  the  guise  of  a 
prosperous  farming  district,  but  that  is  now  a  thing 
of  the  past.  And  when  Mr.  Whittier  mourned  the 
decay  of  the  farm  and  of  rural  life,  and  the  departure 
of  the  ambitious  boy  to  the  town  or  city,  he  touched 
with  song  the  hard  facts  of  an  economic  revolution. 

The  same  pitiless  wave  which  swept  over  Great 
Britain  in  the  latter  part  of  the  last  century,  spreading 
confusion  and  disaster  in  English  farming,  reducing 
prices  of  farm  products,  shrivelling  English  rent  rolls, 
changing  the  character  of  agriculture  in  many  dis- 
tricts, spread  its  influence  also  over  New  England  and 


160  MONEY  AND  PRICES 

the  rest  of  the  Eastern  States — a  wave  set  in  motion 
by  the  progress  of  the  age,  by  the  railway  and  the  im- 
proved steamship.  Its  immediate  effect  was  to  bring 
the  products  of  new,  distant,  and  vastly  richer  farming 
land  into  the  same  markets  where  the  products  of  the 
old  and  poorer  soil  had  been  sold.  In  economic  phrase, 
it  was  the  insertion  into  existing  grades  of  cultivated 
land  of  new  grades  of  higher  fertility.  Consequently, 
if  the  required  supply  of  food  could  be  produced  more 
cheaply  by  the  new  and  better  soils,  the  old  grades 
must  go  out  of  cultivation.  It  mattered  not,  in  the 
inevitable  onward  sweep  of  this  evolution  of  the  fit- 
test instrument  of  production — bringing  cheaper  food 
to  hungry  legions — that  the  owner  of  the  old  farm  had 
attachments  of  heart  and  association  to  the  old  lanes, 
the  old  trees,  and  the  old  blue  hills.  The  progress  of 
the  age  was  under  it  all,  like  a  ploughshare  upturning 
the  nest  of  his  youth. 

The  railway  and  the  steamship  have  not  yet  ceased 
their  iconoclastic  operations.  A  few  years  ago,  the 
varied  expanses  of  middle  New  York  and  the  broad 
valleys  of  the  Susquehanna  made  up  the  flower  of  our 
farms  and  gave  solid  incomes  to  their  owners.  This 
state  of  things  is  now  of  the  past.  Farming  is  no 
longer  as  profitable  in  these  districts,  because  more 
fertile  though  distant  lands  have  been  brought  within 
reach  of  markets.  The  richer  wheat  land  in  the  Middle 
West,  and  of  the  prairies  of  Minnesota  and  Dakota, 
lay  untouched  until  the  railway  opened  up  a  cheaper 


THE  FARMER  AND  THE  RAILWAY       161 

transportation  to  the  lakes  and  seaboard.  The  cause 
of  the  enforced  agricultural  readjustment  in  the  United 
States  was  the  progress  of  the  age,  represented  mainly 
by  the  modern  railway.  The  fall  of  railway  rates  to 
less  than  one  cent  per  ton  per  mile,  and  the  generally 
dubious  condition  of  railway  securities  as  investments, 
were  glaring  evidences  of  the  pressure  to  secure  cheap 
transportation  in  the  exploitation  of  the  West. 

It  is  a  strange  development — indeed,  a  curious  trav- 
esty on  justice — that  the  railway,  which  by  reason  of 
its  low  cost  of  transportation  has  practically  destroyed 
the  farming  interests  of  the  East,  should  be  regarded 
by  the  farmer  of  the  West  as  the  vampire  sucking  out 
the  blood  of  his  agricultural  profits ;  and  yet  the  West- 
ern lands  could  have  been  opened  to  seaboard  markets 
only  by  means  of  it  and  its  low  rates.  The  Eastern 
farmer  must  justly  regard  the  railway,  and  the  result- 
ant competition  of  the  richer  farm-land  in  the  West,  as 
the  cause  of  his  ruin  and  the  force  which  has  driven  him 
to  new  employments;  yet  the  Western  farmer  would  not 
now  be  in  existence  if  it  were  not  for  the  railway.  The 
proof  that  it  has  served  the  Western  farmer  well  is  to 
be  found  in  the  sad  ruins  of  Eastern  agriculture.  But 
by  such  revolutions  is  the  progress  of  invention  marked. 
Every  great  improvement  which  has  cheapened  the 
cost  of  reproducing  existing  forms  of  capital  has  neces- 
sarily lowered  the  value  of  earlier  forms  to  the  level 
at  which  it  can  be  now  reproduced.  Ocean  steam- 
ships which  cost  $500,000  each — and  which  could  later 


162  MONEY  AND  PRICES 

be  built  for  $400,000 — must  have  fallen  in  their  cap- 
italized value  by  one-fifth,  or  twenty  per  cent.,  irre- 
spective of  depreciation  by  wear  and  tear.  In  a  similar 
way,  the  general  introduction  of  steamships  has  low- 
ered the  selling  price  of  sailing  vessels.  Every  owner 
of  capital  in  its  various  forms  must  always  take  the 
risk  that  invention  may  devise  something  cheaper  in 
operation  than  his  existing  machinery. 

§3.  By  the  nature  of  his  occupation,  a  farmer  is 
subject  to  the  foregoing  principle  quite  as  much  as 
any  owner  of  capital.  His  land  may  for  the  moment 
be  the  best  in  cultivation  for  wheat;  but  any  con- 
ceivable discovery,  or  any  improvement  of  existing  de- 
vices, by  which,  directly  or  indirectly,  new  soils  in 
any  part  of  the  world  may  be  brought  into  competition 
with  his  own,  must  lower  the  price  of  his  farm  prod- 
ucts. Wheat,  moreover,  is  a  commodity  whose  price 
is  not  determined  by  home,  but  by  foreign  markets. 
The  wheat-growing  farmer  is,  therefore,  at  the  mercy 
of  world  causes  and  not  merely  of  the  domestic  events 
within  the  boundaries  of  his  own  country.  We  our- 
selves do  not  consume  nearly  the  whole  product  of  our 
wheat  or  cotton  land.  We  export  largely  beyond  our 
own  consumption.  In  1896,  out  of  a  total  production 
of  467,102,947  bushels  of  wheat,  we  exported  126,433,- 
968  (27  per  cent.),  and  consumed  at  home  340,658,979. 
In  1898,  our  exports  of  wheat  rose  to  40  per  cent,  of 
our  production.    It  will  at  once  appear  to  the  reader 


WHEAT  AND   WORLD  MARKETS  163 

how  surely  the  price  of  wheat  must  respond  to  influ- 
ences quite  out  of  the  ken  of  the  ordinary  farmer,  and 
yet  that  the  continuance  of  farming  depends  upon  his 
keeping  careful  watch  of  all  the  forces  affecting  his 
business,  wherever  and  however  they  may  be  acting 
throughout  the  world. 

The  simple  fact  that  we  produce  more  wheat  than 
we  consume,  and  that,  consequently,  the  price  of  the 
whole  crop  is  determined,  not  by  the  markets  within 
this  country,  but  by  the  world  markets,  are  sufficient 
to  put  wheat,  as  regards  its  price,  in  a  different  class 
from  those  articles  whose  markets  are  local.  It  differs 
very  radically,  for  example,  from  corn:  while  we  ex- 
ported over  40  per  cent,  of  our  wheat  crop  in  1898, 
we  exported  only  11. 14  per  cent,  of  our  corn  crop,  and 
in  many  years  less  than  2  per  cent.  Whether  he  knows 
it  or  not,  whether  he  likes  it  or  not,  every  man  who 
chooses  as  his  occupation  in  life  the  growing  of  wheat 
must  be  affected  by  everything  which  influences  the 
production  and  price  of  that  article  throughout  the 
entire  world.  And  it  need  not  be  said  that  many 
wheat-growing  farmers  make  little  or  no  allowance 
for  events  beyond  their  limited  range  of  local  informa- 
tion. A  good  crop  in  Europe  means  a  lessened  demand 
for  American  wheat;  a  large  European  crop,  accom- 
panied by  a  very  large  harvest  at  home,  is  sure  to  de- 
press the  price  abnormally;  and  if,  in  addition  to  these 
two  uniting  causes,  competing  countries  in  Asia,  South 
America,  Africa,  and  Australia  send  large  quantities 


164  MONEY  AND  PRICES 

of  the  same  grain  to  Europe,  the  price  may  fall  still 
further.  A  given  demand  may  be  more  than  met  by 
an  exceptional  supply.  It  must  then  be  remembered, 
too,  that  as  regards  an  article  of  food  like  wheat,  after 
a  person  has  taken  his  usual  quantity,  his  demand  does 
not  rise  with  a  falling  price,  but,  after  a  saturation 
point  of  desire  is  reached,  it  practically  ceases  alto- 
gether. This  accounts  for  the  extreme  fall  in  price 
produced  by  a  supply  only  slightly  in  excess  of  the  or- 
dinary demand.  Does  the  farmer  of  our  Western 
States  study  to  adapt  his  supply  to  the  known  demand, 
as  the  manufacturer  does?  Probably  not;  he  plants 
because  he  has  wheat  land,  or  because  the  price  was 
high  the  year  before,  and  leaves  the  rest  to  the  mysteri- 
ous play  of  forces  outside  his  ken.  Yet  it  is  certain, 
nevertheless,  that  the  price  of  his  grain  is  determined 
by  events  in  Australia,  Argentina,  Egypt,  India,  Hun- 
gary, and  Russia,  or  by  excessive  rains  in  England, 
France,  or  Germany.  To  know  the  economic  nature 
of  the  farmer's  occupation  is  necessary  to  an  under- 
standing of  his  existing  situation,  and  one  can  clearly 
see  how  varied  are  the  world  influences  which  may 
affect  his  efforts  in  growing  wheat. 

§  4.  The  revolution  by  which  invention  and  prog- 
ress have  forced  a  readjustment  of  industries,  with  a 
better  relation  to  our  natural  resources,  has  wrenched 
the  country  and  twisted  it  into  new  shapes.  It  has 
taken  away  the  farming  industry  from  the  older  States, 


MOVEMENT  FROM  THE  FARM  165 

and  given  it  to  the  newer  territory  where  soils  are 
richer.  The  problem  left  to  the  farmers  of  the  Middle 
States  is  the  difficult  one  correctly  to  learn  the  causes 
of  the  agricultural  readjustment;  to  master  the  quali- 
ties of  the  old  soil  for  other  crops;  scientifically  to 
adapt  the  land  to  the  new  conditions  brought  by  the 
opening  up  of  new  areas  of  superior  soil.  It  is  a  prob- 
lem requiring  a  high  order  of  intelligence  and  scientific 
training  in  farming. 

But  a  problem  which  under  the  most  favorable  con- 
ditions would  be  a  complex  and  difficult  one,  is  made 
far  more  serious  by  a  movement  which  has  taken  away 
from  farming  the  most  enterprising  spirits  and  the 
most  vigorous  brains.  The  movement  of  the  better 
minds  away  from  the  farms  to  the  towns,  where  a 
wider  career  is  opened,  is  so  well  known  to  Americans 
that  I  do  not  need  to  describe  it.  Ambitious  Ameri- 
cans have  left  certain  districts  of  New  England  mainly 
to  the  small  farming  of  the  Irish  and  later  to  the 
Finns;  and  the  Middle  States  have  likewise  enlarged 
their  quotas  in  the  towns.  It  is  one  of  the  most 
marked  events  in  our  economic  history.  The  brightest 
youths  speed  to  the  cities  as  a  matter  of  course. 

But  even  if,  with  Mr.  Whittier,  we  sing  dolorously 
of  the  abandoned  farm,  we  cannot  fail  to  see  above  the 
horizon  the  expanding  roofs  of  the  manufacturing  town 
and  the  glittering  attractions  of  the  greater  cities.  We 
must  see  also  a  larger  power  to  purchase  food  and  other 
necessaries  in  the  wages  of  the  daily  laborer,  graded 


1 66  MONEY  AND  PRICES 

schools  instead  of  the  "district"  schools,  better  drain- 
age, better  lighting,  a  larger  nervous  excitement,  more 
stimulus  to  the  average  mind,  a  response  to  the  offer 
of  more  intellectual  tonics,  a  wider  reading,  and  a 
more  intelligent  acquaintance  with  the  lives  and  man- 
ners of  cultivated  persons.  If  the  moral  tone  of  the 
city  and  town  be  low,  in  all  probability  children  there 
are  safer  than  on  the  farm  from  vulgar  vice,  and  from 
that  inward  moral  starvation  which  follows  upon  a 
lack  of  mental  nourishment.  In  short,  when  in  some 
farming  districts  one  notes  the  bad  roads,  the  social 
privation,  the  lonely  isolation  of  farm  life,  one  wonders 
that  there  are  any  farmers.  The  movement  to  the 
towns  is  really  an  answer  to  a  craving  for  something 
besides  mere  material  existence :  it  arises  from  a  delight 
in  the  society  of  others  and  in  access  to  amusement 
and  information;  from  aesthetic  satisfaction  and  a 
general  striving  for  the  better  thing. 

The  effect  of  these  revolutions  upon  farming  was 
that  in  those  years  when  a  great  industrial  readjust- 
ment was  taking  place  which  required  the  best  efforts 
of  the  best  intelligences,  at  the  very  time  when  the 
hardest  problem  was  presented  for  solution,  social 
forces  were  at  work  to  take  away  the  men  best  capable 
of  solving  the  problem.  Just  as  the  situation  became 
increasingly  serious,  the  least  efficient  were  left  to 
meet  it.  It  is  not  necessary  for  me  to  say,  by  way  of 
qualification,  that  there  are  efficient  farmers;  of  course 
there  are.    Wherever  one  finds  executive  ability  and 


WESTERN  FARM  MORTGAGES  167 

training  in  farming,  there  one  is  likely  to  see  success, 
as  in  any  other  occupation  of  life.  But  it  is  the  pur- 
pose only  to  emphasize  the  general  point,  that  from 
the  nature  of  his  occupation  the  farmer  is  subjected 
to  world-wide  operations  requiring  careful  foresight; 
that  the  age  is  bringing  him  new  adjustments  and  new 
problems;  and  yet  that  the  concomitant  part  of  the 
situation  has  been  a  marked  reduction,  due  to  the 
attractions  of  our  cities,  in  the  quality  of  farming  skill 
and  capacity. 

§  5.  But  the  farmers  on  the  richer  soils  of  the  trans- 
Mississippi  States,  although  holding  the  coigne  of 
vantage  relatively  to  other  farmers  in  this  country, 
especially  as  regards  wheat-growing,  have  been  them- 
selves affected  by  special  influences  of  an  unfavorable 
kind.  In  the  years  of  prosperity  after  recovery  from 
the  panic  of  1873,  the  Western  farming  districts  suf- 
fered from  a  curious  epidemic  of  farm  loans,  an  un- 
exampled prevalence  of  borrowing-made-easy.  East- 
ern money-lenders  sent  unlimited  sums,  with  reckless 
confidence,  to  be  loaned  on  Western  farm  mortgages. 
So  little  discrimination  was  exercised  in  this  expansive 
era  that  the  droughty  lands  of  Kansas  and  Nebraska 
were  estimated  to  be  as  good  security  as  the  more 
trustworthy  soil  of  Iowa  and  Minnesota.  Methods 
of  lending  were  careless;  and  the  unwary  met  sad 
treatment  at  the  hands  of  rogues,  or  fell  victims  to 
poor  land  titles.     The  abundance  of  loanable  capital 


168  MONEY  AND  PRICES 

set  a  premium  on  borrowing,  and  few  farmers  in  need 
of  improving  their  farms  escaped  the  temptation. 
They  were  led  into  plans  for  expenditure  without  fully 
realizing  the  risks  of  farming,  the  operation  of  world 
causes  upon  agricultural  prices,  or  the  difficulties  of 
repaying  loans  after  they  were  spent. 

When  the  country  had  recovered  from  the  panic  of 
1873,  the  development  of  western  Minnesota  and  Da- 
kota entered  upon  a  stage  of  speculative  expansion 
quite  as  dashing  and  bold  as  any  ventures  of  Wall 
Street  brokers.  Overconfidence  was  sublime.  No 
other  part  of  the  country  was  comparable  for  sound 
investment  to  this  wheat  Eldorado;  the  East  was  a 
doubtful  place  for  solid  prosperity  in  comparison  with 
this  brilliant  addition  to  our  resources.  Fortunes  were 
to  be  made  only  in  farming.  Fathers  bought  shares  in 
the  ventures  undertaken  by  their  sons  who  had  moved 
to  the  new  West.  Old  residents  of  Ohio,  Illinois,  or 
Wisconsin  sold  their  lands  to  join  the  great  hegira.  In 
its  way  it  was  as  picturesque  and  exciting  as  any  like 
event  in  our  history;  and  it  would  not  be  easy  to  ex- 
aggerate the  intensity  of  speculation  in  this  period  of 
the  early  eighties,  soon  after  the  resumption  of  specie 
payments. 

This  overdevelopment  was  to  the  farmers  what 
overtrading  is  to  the  commercial  world.  The  expan- 
sion having  gone  beyond  legitimate  bounds,  the  re- 
action was  certain  to  come.  The  drought,  hot  winds, 
and  consequent  failure  of  crops,  in  Kansas  and  Ne- 


WHEAT  AND  COMPETITIVE  MARKETS     169 

braska,   startled  Eastern  lenders  into  the  discovery 
that  the  lands  were  in  many  cases  valueless  as  security. 
The  time  for  repayment  of  loans  came  around,  and 
brought  with  it  a  test  of  the  good  judgment  of  the  bor- 
rowers in  the  use  of  their  loans.     Bad  judgment  and 
lack  of  skill  meant  inability  to  repay.     "Settling  day" 
is  in  any  market  a  solemn  occasion,  but  in  the  case  of 
farm  loans  it  is  sure  to  reveal  all  the  weak  spots.     A 
vast  deal  of  capital,  of  course,  was  properly  lent,  and 
wisely  expended  in  improvements;    but  this  was  far 
from  being  commonly  true.     In  justification  of  this 
statement  it  is  necessary  no  more  than  to  refer  to  the 
many  failures  of  Western  mortgage  companies,  and 
to  the  generally  suspicious  attitude  in  regard  to  their 
investments  which  followed.     It  is  not  implied,  by  any 
means,  that  there  are  not  good  Western  farm  mort- 
gages, but  only  that  the  era  of  speculation  was  fol- 
lowed by  the  inevitable  reaction. 

Under  the  influences  of  this  period  farmers  had  bor- 
rowed, and  pledged  themselves  to  the  payment  of  fixed 
units  of  money.  While  agriculture  was  booming,  the 
ability  to  change  wheat  into  these  units  for  repayment 
seemed  easy;  and  if  this  situation  had  remained  un- 
changed all  might  have  gone  well.  But  there  soon 
came  a  heaving  of  the  calm  sea,  showing  that  storms 
were  going  on  in  other  parts  of  the  wide  waters.  As 
was  pointed  out,  the  world  causes  had  to  be  taken 
into  account.  Just  when  the  reaction  in  American 
farming  began  to  set  in,  the  distant  countries  of  the 


170  MONEY  AND  PRICES 

world,  which  had  begun  to  send  wheat  to  the  same 
competitive  markets,  rapidly  increased  their  exports. 
The  sudden  enlargement  of  the  supply  without  any 
corresponding  increase  of  demand  produced  that  alarm- 
ing fall  in  the  price  of  wheat  which  has  been  made  the 
farmer's  excuse  for  thinking  that  silver  is  the  magic 
panacea  for  all  his  ills.  At  the  very  time  when  the 
American  farmer  was  under  pressure  to  increase  his 
production  in  every  possible  way,  he  was  disastrously 
affected  by  a  similar  increase  in  other  countries.  In 
short,  the  agencies  which  opened  up  the  superior 
wheat-fields  of  the  Dakotas  were  not  confined  to  the 
United  States.  The  progress  of  the  age  in  the  form 
of  cheapened  railway  transportation  revolutionized  the 
agriculture  of  our  country;  but  likewise  the  progress 
of  the  age  in  the  form  of  cheapened  steamship  trans- 
portation opened  up  to  European  consumers  the  su- 
perior wheat-fields  of  Argentina,  Australia,  Egypt,  and 
India.  Yet  the  Western  farmer  ploughed  and  sowed 
blindly,  as  if  his  were  the  only  sources  of  wheat-supply 
in  the  world. 

Here  was  the  pith  of  the  whole  trouble  with  the 
farmer  of  the  farther  West.  The  boom  and  wild  ex- 
pansion consequent  upon  the  settlement  of  the  Da- 
kotas brought  about  the  inevitable  reaction.  The  one 
serious  difficulty  to  the  sufferer  was  that  there  were 
special  conditions,  in  a  great  measure  influencing  agri- 
culture alone,  which  produced  the  same  results  that  a 
violent  commercial  crisis  produces  in  a  wide  range  of 


GOLD  AND   WHEAT  PRICES  171 

industries.  To  be  sure,  a  disaster  in  farming  conveys 
the  impact  of  damage  to  other  allied  interests;  but 
here  were  conditions,  the  results  of  seismic  convulsions 
throughout  the  world,  practically  uncomprehended  by 
those  most  deeply  affected,  and  yet  not  directly  touch- 
ing other  great  industries.  Forces  special  to  agricul- 
ture, although  moving  all  over  the  world,  narrowed 
in  upon  our  Western  farmers,  quite  unconscious  of 
the  currents  that  were  bearing  them  up  and  dashing 
them  on  the  rocks.  If  we  understand,  then,  that  the 
agriculture  of  the  Middle  West  had  been  suffering 
bitterly  from  readjustment;  and  more  than  this,  that 
even  the  favored  farmers  of  the  richest  land  in  the  re- 
moter West  (whose  success  had  ruined  the  Eastern 
farmers)  had  been  suffering  from  a  disaster  not  en- 
tirely of  their  own  making,  we  may  be  better  able  to 
judge  of  their  consequent  unrest.  They  were  in  a 
measure  responsible  for  the  wild  expansion  of  the  early 
eighties,  but  they  were  to  be  judged  leniently  for  their 
ignorance  of  those  waves  of  damage  which  came  from 
abroad. 

§  6.  Feeling  the  coils  of  some  mysterious  power 
about  them,  the  farmers,  in  all  honesty,  attributed 
their  misfortunes  to  the  "constriction"  in  prices, 
caused,  as  they  thought,  not  by  an  increased  pro- 
duction of  wheat  throughout  the  world,  but  by  the 
"scarcity  of  gold."  This  seems  hardly  an  adequate  ex- 
planation, just  at  the  time  when  the  gold  product  was 


172  MONEY  AND  PRICES 

doubling  itself.  If  scarcity  of  gold  had  been  pushing 
prices  down,  why  did  not  an  abundance  of  gold  push 
prices  up  ?  This  explanation  of  low  prices  as  caused  by 
insufficient  gold  is  so  far-fetched  that  its  general  use 
seems  inexplicable.  The  existence  of  such  a  theory  in 
explanation  of  the  low  price  of  wheat  is  so  unnatural 
that  it  leads  one  to  suspect  the  guidance  of  an  inter- 
ested and  intriguing  power.  Therein  is  to  be  found  one 
of  the  most  interesting  parts  of  that  situation.  The 
undereducated  man,  capable  of  holding  but  one  idea 
at  a  time,  and  holding  that  idea  fanatically,  crushed 
by  the  coils  of  an  industrial  readjustment,  with  a 
system  depressed  by  a  speculative  debauch,  found 
supposed  helpers  in  the  wiliest  managers  who  have 
ever  entered  American  politics.  This  was,  in  a  nut- 
shell, the  true  philosophy  of  the  movement  in  favor 
of  free  coinage  of  silver. 

Given  a  large  community  with  innate  prejudices 
against  the  East,  intensified  by  the  dislike  born  of  the 
relation  of  debtor  to  creditor,  prostrated  by  the  col- 
lapse of  the  greatest  agricultural  speculation  of  modern 
times,  suffering  from  foreign  competition  in  the  world 
markets,  the  opportunity  of  the  tempter  was  nearly 
perfect.  And  the  skill  of  the  tempter  was  satanic.  I 
doubt  if  ever  in  our  political  history  we  have  had  more 
adroit  manipulation  and  strategy  than  were  displayed 
by  the  managers  of  the  silver  party.  In  Congress  they 
were  more  than  a  match  in  plans  and  ingenuity  for 
the  leaders  of  the  two  great  parties.    Supplied  with 


THE  SILVER  PROPAGANDA  173 

abundant  means  by  the  silver  mining  interests,  they 
"buncoed"  one  party  or  coquetted  with  another,  as 
suited  their  interests.  While  extending  their  propa- 
ganda for  years  in  the  ranks  of  the  Democratic  party 
throughout  the  West  and  South,  they  bargained  with 
the  leaders  of  the  Republican  party  in  Congress  for 
legislation  favorable  to  silver  in  return  for  votes  for 
special  and  private  interests.  It  was  in  this  way  that 
the  so-called  Sherman  Act  of  1890  was  passed.  When 
they  were  given  an  inch  they  took  an  ell,  until  the 
country  stood  aghast  at  rinding  these  silver  managers 
holding  the  national  legislature  by  the  throat,  and  de- 
manding silver  legislation  or  a  stoppage  of  all  old 
" deals."  It  was  a  political  brigandage  that  put  the 
little  byplay  of  Greek  bandits  to  shame.  A  game  of 
burglary  like  this  in  the  Capitol  at  Washington  was 
as  audacious  as  the  seizure  of  money-tills  at  high  noon 
on  a  crowded  street. 

This,  however,  was  but  one  part  of  the  great  silver 
conspiracy,  the  equal  of  which  has  never  been  re- 
corded, and  which  is  too  considerable  for  me  to  do 
more  than  refer  to  here.  It  embraced  in  its  plans 
years  of  systematic  agitation  of  the  silver  doctrines, 
both  by  speaking  and  by  writing,  among  those  dissatis- 
fied classes  which  I  have  described.  The  situation  of 
farmers  in  the  West,  depressed  after  a  collapse  of  a 
speculation  in  wheat  lands,  and  of  cotton-growers  in 
the  South  the  price  of  whose  product  also  had  been 
disturbed  by  world  causes,  was  a  rich  soil  for  the  silver 


174  MONEY  AND  PRICES 

propaganda.  It  was  begun  stealthily  and  secretly, 
and  carried  on  later  with  noise  and  open  activity. 
Newspapers  were  hired  to  exploit  and  advertise  silver 
literature  in  a  way  to  enlarge  their  list  of  subscribers. 
A  literary  bureau  controlled  a  systematic  distribution 
of  "catchy"  and  "taking"  illustrated  reading-matter. 
The  prejudices  and  antagonisms  of  classes  were  ap- 
pealed to  most  skilfully.  The  wheat-farmer  and  the 
cotton-grower  were  for  years  practically  permitted  to 
hear  nothing  else  but  the  wrongs  of  silver,  the  evil 
effects  of  gold,  and  the  grinding  oppression  of  the 
money-lender.  As  a  piece  of  successful  political  in- 
trigue and  agitation,  this  propaganda  was  probably 
the  most  effective  since  the  repeal  of  the  Corn  Laws. 
One  can  have  nothing  but  admiration  for  the  consum- 
mate political  skill  displayed  by  the  managers  of  the 
silver  party. 

How  adroitly  a  situation  of  agricultural  depression, 
due  to  an  industrial  revolution,  has  been  made  to 
serve  the  owners  of  silver,  the  presidential  campaign 
of  1896  gave  convincing  evidence.  At  that  time,  sil- 
ver was  jangling  in  the  ears  of  those  who,  a  few  years 
later,  would  have  permitted  only  the  music  of  some  new 
craze  to  be  heard.  If  the  conditions  which  allow  of 
delusions  among  the  farmers  were  of  passing  duration, 
if  in  a  few  years  we  might  see  Western  farming  recover 
from  its  depression  as  easily  as  we  see  manufacturing 
and  trade  readjust  themselves  after  a  commercial 
crisis,  the  remedy  would  not  be  far  to  seek.     But  the 


FUTURE  OF  FARMING  175 

opening  up  of  new  wheat  areas  to  European  markets 
is  not  a  thing  that,  rising  like  a  wave,  like  a  wave  dis- 
appears; it  is  a  permanent  uplift  of  the  sea-level.  It 
has  come  to  stay,  and  probably  to  rise  still  higher;  in- 
deed, some  exceptional  emergency  like  war  may  come 
to  lessen  foreign  production  and  also  raise  the  price  of 
food.  Farming  will  go  on,  and  go  on  profitably;  but 
it  will  never  realize  all  the  bright  dreams  of  the  bal- 
looning years  in  the  early  eighties.  How  natural  that 
the  seeds  of  dissatisfaction  should  grow  up  in  the  vari- 
ous forms  of  protest  against  existing  legislative  and 
social  arrangements !  It  was  precisely  the  expansive, 
optimistic,  speculating  American-born  in  whose  minds 
these  erratic  developments  took  deepest  root.  Our 
less  mercurial  Germans  and  shrewder  Scandinavians 
were  safer  than  our  Americans  in  the  day  of  crazes. 


CHAPTER  VII 
SOCIALISM  IN  THE  PRICE  QUESTION 

§  i.  In  its  essentials,  the  popular  demand  for  free 
silver  coinage  was  not  an  isolated  agitation  unrelated 
to  other  thinking  of  the  past  and  present.  Nor  was  it 
disconnected  from  the  movements  of  the  time  which 
to  the  casual  observer  seemed  quite  separated  from 
the  monetary  discussion.  Through  the  proposals  to 
obtain  a  larger  supply  of  money,  and  through  the  ex- 
pressed fear  of  a  scarcity  of  gold,  ran  a  philosophy  of 
government  which  reappears  in  demands  varied  in 
their  nature,  but  which  are  one  and  the  same  in  source 
and  spirit.  Those  who  wish  well  to  the  republic  may 
fitly  inquire  into  these  underlying  currents  which  carry 
the  people  on  quite  unconscious  of  ultimate  results. 
If  our  ship  is  to  reach  a  predetermined  port,  we  must 
daily  take  exact  observations,  watch  the  currents,  and 
set  our  course  by  the  compass.  We  can  no  more  ex- 
pect to  have  good  government  by  meeting  hard  public 
questions  by  neglect  or  sentiment,  than  we  can  hope 
to  sail  a  ship  with  children  or  invalids. 

It  should  be  remembered  that  in  the  same  soil  in 
which  grew  free  coinage  of  silver,  there  also  flourished 
paper-money  expansion,  loans  by  the  government  di- 
rectly to  the  people,  and  state  control  of  railways. 

176 


QUANTITY  OF  MONEY  177 

Through  all  of  these  ran  a  common  principle.  They 
were  all  varied  expressions  of  the  same  point  of  view. 
We  shall  understand  our  political  questions  better  if 
we  grasp  the  deeper  common  cause  which  underlies 
many  of  these  dissimilar  demands.  It  will  not  be  diffi- 
cult to  analyze  the  propositions  advanced  in  past 
monetary  campaigns  so  that  their  originating  force 
may  be  distinctly  understood,  and  their  close  relation- 
ship to  other  agitations  easily  seen. 

Throughout  past  discussions  on  money  runs  the  fre- 
quent and  insistent  demand  for  an  abundant  currency, 
for  "more  money,"  for  money  enough  to  keep  up 
prices,  and,  as  if  prices  depended  on  the  quantity  of 
money  in  circulation,  a  demand  for  governmental 
action  such  that  prices  may  be  regulated  by  control- 
ling the  quantity  of  money.  This  conception  is  by 
no  means  confined  to  Populistic  platforms;  it  has  been 
found  in  the  writings  of  international  bimetallists, 
who  urged  that  we  needed  an  addition  of  silver  to  our 
world's  money  because  there  was  not  enough  gold  to 
^eep  prices  from  falling.  Here  again  is  a  plan  to  ma- 
nipulate prices  by  legislative  action  based  on  the  quan- 
tity of  money.  These  positions  are  untenable,  either 
from  the  point  of  view  of  the  principles  of  money,  or 
of  the  facts  of  our  business  life.  In  truth,  the  wide  dif- 
ferences between  money  "doctors"  arise  from  reason- 
ing on  an  invalid  basis  of  theory;  moreover,  if  the 
premises  are  unsound,  it  is  impossible  that  they  should 
square   with   the   results   of   actual   experience.     The 


178  MONEY  AND  PRICES 

principles  of  money  having  been  already  given,  it  may 
be  permitted  to  indicate  here  the  reasons  why  a  great 
deal  of  monetary  literature  (both  on  the  gold  and  silver 
side)  is  incorrect  and  bootless. 

If  the  word  money  is  used  in  different  senses  con- 
fusion naturally  arises.  If  prices  depend  on  the  quan- 
tity of  money  in  circulation,  by  money  do  we  mean 
only  the  quantity  of  gold  which  circulates  in  the  United 
States?  Or  all  the  gold  in  circulation  throughout  the 
world?  Or  should  it  include  all  the  media  of  ex- 
change by  which  transactions  are  settled?  Not  even 
by  authoritative  writers  on  money  is  this  confusion 
properly  avoided.  And  for  a  good  and  sufficient  rea- 
son. The  simple  and  correct  conception  of  price  has 
not  been  always  kept  in  mind.  In  addition,  no  proper 
distinction  has  been  insisted  on  between  the  standard 
or  common  denominator,  in  which  goods  are  priced, 
and  the  medium  by  which  goods  (after  their  price  has 
been  made)  are,  in  fact,  exchanged.  This  can  be  briefly 
explained. 

In  this  country,  where  gold  is  the  standard,  price 
is  the  quantity  of  gold  for  which  an  article  exchanges. 
The  standard  is  not  an  abstraction,  but  a  material 
commodity,  in  which  price  is  expressed;  price  is  sim- 
ply the  ratio  between  goods  and  gold.  If  the  price  of 
a  horse,  for  instance,  is  $100,  that  is  only  a  way  of 
saying  that  the  horse  exchanges  for  the  quantity  of 
gold  in  $100  of  our  coinage.  Should  the  horse  go  per- 
manently lame,  it  would  exchange  for  less  gold ;  that 


PRICES  AND   CHANGES  IN   GOLD         179 

is,  its  price  would  fall.  Although  the  fall  in  price  of  the 
horse  arose  from  causes  solely  affecting  itself  and  not 
gold,  still  it  makes  no  difference  whether  we  say  that 
the  horse  has  fallen  relatively  to  gold,  or  that  gold 
has  risen  relatively  to  the  horse.  The  fact  of  a  change 
implies  nothing  as  to  the  cause  of  the  change.  To 
take  another  illustration:  If  nothing  had  happened  to 
change  the  demand  for,  and  supply  of,  gold,  and  yet 
if  a  new  process  had  cheapened  the  cost  of  making 
steel,  then  the  price  of  steel  expressed  in  gold  would 
fall.  Hence  it  would  result  that  gold  had  increased 
in  value  relatively  to  steel  for  reasons  affecting  only 
the  steel  side  of  the  price  ratio.  In  short,  gold  may 
increase  in  value  if  goods  are  cheapened  in  their  ex- 
penses of  production;  but  this  fact  may  not  be  due  to 
any  cause  originating  with,  or  operating  on,  gold  alone. 
Anything  which  increases  or  diminishes  the  demand 
for,  or  the  supply  of,  gold,  and  anything  which  in- 
creases the  expenses  of  production  of  goods,  affects  their 
price  in  gold.  Therefore  it  is  shallow  to  suppose  that 
prices  can  be  modified  only  by  changes  on  the  gold 
side  of  the  comparison.  And  yet  volumes  have  been 
written  based  on  that  error. 

What  has  just  been  said  applies  not  only  to  metallic 
money  but  also  to  paper  money.  Sometimes  it  is 
strongly  urged  that  the  value  of  paper  money  (and 
prices  expressed  in  it)  varies  according  to  the  quantity 
in  circulation.  Both  principle  and  fact,  however,  are 
against  this  proposition.     A  paper  money  which  de- 


180  MONEY  AND  PRICES 

predates,  clearly  acts  to  change  the  standard,  and 
prices,  in  a  cheaper  standard,  necessarily  rise.  Prices 
in  a  paper  redeemable  in  gold  would  be  the  same  as 
gold  prices.  Issues  of  paper  money  can  change  price 
only  by  changing  the  standard  with  which  goods  are 
compared.  It  is  not  the  quantity,  but  the  quality  of 
paper  money  which  affects  price. 

§  2.  The  failure  to  distinguish  between  money  as 
a  standard  and  money  as  a  medium  of  exchange  has 
led  to  much  confusion.  It  does  not  at  all  follow  that 
the  metal  chosen  by  a  country  as  its  standard  of  prices 
is  also  much  used  as  a  medium  of  exchange  in  business 
transactions.  After  prices  have  been  arrived  at  by  a 
comparison  of  goods  with  the  standard  (gold,  for  ex- 
ample), a  medium  of  exchange  quite  different  from 
the  standard  metal  is  then  often  called  into  use.  For 
instance,  although  we  have  the  gold  standard  in  the 
United  States,  over  90  per  cent,  of  our  wholesale 
transactions  are  settled  by  the  use  of  the  check  and 
deposit  system.  Such  a  means  of  carrying  through 
buying  and  selling,  without  the  use  of  gold,  is  at  once 
efficient  and  inexpensive;  and  it  gives  no  warrant  for 
assuming  that  as  transactions  increase  the  demand  for 
the  standard  money  increases.  In  Great  Britain,  also, 
an  enormous  commerce,  vast  quantities  of  exports 
and  imports,  and  phenomenally  large  financial  deal- 
ings, are  settled  with  no  more  gold  in  reserve  than  could 
be  supplied  by  the  world's  production  in  a  single  year. 


VOLUME  OF  MEDIA  OF  EXCHANGE      181 

The  British  have  the  gold  standard,  but  use  compara- 
tively little  gold  as  a  medium  of  exchange,  and  that  in 
small  denominations.  Banking  facilities  serve  effec- 
tually as  a  means  of  settling  vast  transactions. 

We  are  thus  able  to  see  that  devices  chosen  as 
media  of  exchange,  whether  bank-notes  or  checks  or 
bills  of  exchange,  may  rise  or  fall  in  amount  without 
in  themselves  affecting  relatively  either  the  gold  or 
the  goods  in  the  price  ratio.  If  bank-notes  are  intro- 
duced they  may  to  some  extent  economize  the  use  of 
gold.  But  only  as  they  diminish  the  demand  for  gold 
throughout  the  world  would  they  thereby  affect  the 
world  value  of  gold,  and  thus  raise  prices  by  touching 
one  side  of  the  price  ratio.  In  general,  however,  the 
price  ratio  cannot  be  affected  at  any  given  time  by 
fluctuations  in  the  volume  of  the  media  of  exchange 
within  a  country.  Checks  and  drafts  do  not  raise 
prices  as  a  consequence  of  an  increase  in  their  quan- 
tity; in  fact,  checks  and  drafts  originate  as  a  result 
of  transactions  in  goods,  after  their  prices  have  been 
determined,  and  for  sums  exactly  fixed  by  the  previous 
dealings  between  buyers  and  sellers.  Such  media  of 
exchange  represent  property  expressed  in  terms  of 
the  standard,  which  property  is  then  readily  exchange- 
able against  other  property  similarly  expressed.  The 
fact  that  sums  of  gold  are  held  as  bank  reserves  does 
not  weaken  this  position.1 

If  we  keep  in  mind  that  price  is  obtained  only  by 

1  Cf.  supra,  chap.  Ill,  §  6,  and  chap.  V,  §  6. 


182  MONEY  AND  PRICES 

comparison  of  goods  with  the  commodity  used  as  the 
standard,  and  not  by  first  ascertaining  the  volume  of 
the  media  of  exchange,  we  shall  have  advanced  far  in 
our  understanding  of  monetary  questions.  Indeed, 
as  already  said,  the  media  of  exchange  may  rise  or 
fall  in  quantity,  without  themselves  affecting  the  gen- 
eral level  of  prices.  It  may  be  noted,  however,  that 
when  gold  is  chosen  as  a  standard  instead  of  some  other 
commodity,  a  demand  for  gold  is  thereby  created  and 
its  value  is  enhanced.  But  only  so  far  as  gold  is 
actually  used  as  a  medium  of  exchange  in  business 
transactions  is  this  true.  This  use  varies  in  different 
countries  according  to  monetary  habits.  Hence  it 
cannot  at  all  be  argued  that,  as  transactions  increase, 
there  is  a  proportional  increase  in  the  demand  for  gold. 
In  truth,  it  is  the  tendency  of  the  age  to  use  gold  less 
and  less  as  a  medium  of  exchange.  In  order  that  gold 
should  be  increased  in  value  (by  causes  directly  affect- 
ing itself)  it  must  be  shown  that  an  increasing  demand 
should  have  exceeded  the  increasing  supply.  Without 
doubt  there  has  been  enough  gold  to  meet  the  money 
demand  and  also  to  take  the  place  of  discarded  silver. 
The  low  price  of  silver  was  the  proof  of  an  abundance 
of  gold. 

§  3.  A  realization  of  the  fact  that  a  great  and  un- 
paralleled increase  in  the  supply  of  gold  during  the 
years  from  1875  to  1895  had  not  been  followed  by  a 
rise  in  prices,  gave  thoughtful  men — like  the  German 


GOLD  AND  PRICE  LEVEL  183 

economists,  Conrad  and  Lexis — ground  for  a  change 
of  belief.  They  saw  that  as  no  rise  of  prices  resulted 
from  the  phenomenal  increase  in  the  supply  of  gold, 
it  could  not  be  argued  that  prices  had  fallen  because 
gold  had  been  scarce.  The  facts,  in  short,  were  dead 
against  comparisons  between  the  mass  of  business 
transactions  and  the  quantity  of  gold  as  a  means  of 
explaining  the  level  of  prices.  This  must  be  true,  be- 
cause the  demand  for  and  supply  of  gold  do  not  in- 
clude all  the  factors  entering  into  the  determination 
of  price.  The  assumption  of  the  international  bimet- 
"  allists,  therefore,  that  prices  have  been  lowered  be- 
cause gold  is  scarce,  falls  to  the  ground.  It  surely  is 
bad  reasoning  to  build  a  policy  and  dogmatically  urge 
it  upon  nations  for  universal  adoption  which  leaves 
out  of  account  one-half  of  the  factors  in  the  problem 
and  practically  disregards  the  fundamental  concep- 
tion of  price. 

If,  then,  it  should  be  admitted  that  prices  do  not  de- 
pend upon  the  quantity  of  money  (e.  g.,  gold)  in  cir- 
culation, then  all  the  schemes  to  raise  prices  based 
upon  this  idea  would  be  futile.  The  theorists  of  this 
school  would  not  be  able  to  raise  prices  merely  by  an 
increase  in  the  quantity  of  gold;  for  this  has  been 
tested  by  the  facts  and  found  wanting.  But  yet 
where  there  is  so  much  smoke  there  must  be  some 
fire.  If  there  is  so  wide-spread  a  belief  in  the  ability 
to  change  prices  by  the  use  of  monetary  legislation, 
there  must  be  something  in  it.     And  there  undoubt- 


1 84  MONEY  AND  PRICES 

edly  is.  Any  action  upon  the  standard  side  of  the 
price  ratio  which  supplants  a  given  standard  by  one 
of  lower  value,  or  which  introduces  a  counterfeit  pre- 
sentment of  the  standard  in  paper  which  is  not  re- 
deemed in  coin  and  so  has  fallen  in  value — in  either 
case,  the  standard  being  lowered,  prices  would  be 
raised.  That  is  absolutely  plain.  But  that  is  a  very 
different  thing  from  raising  prices  by  increasing  the 
quantity  of  the  standard  metal.  If  we  should 
lighten  the  avoirdupois  pound  by  one-half,  then  a  bag 
of  flour  which  on  the  old  scales  weighed  one  hundred 
pounds,  would  mark  off  two  hundred  pounds  under 
the  depreciated  standard.  In  a  similar  way,  without 
changing  the  methods  of  production  in  the  least,  a 
cheapening  of  the  standard  money  would  raise  prices. 
(Although  it  must  be  remembered  that,  as  before 
mentioned,  increasing  ease  in  obtaining  gold  may  be 
prevented  from  raising  prices  by  lessened  cost  of  pro- 
duction of  goods,  thus  counteracting  the  effect  of  more 
gold  and  keeping  prices  low  while  gold  is  very  abun- 
dant.) Prices  in  any  country  are  no  more  determined 
by  the  quantity  of  gold  in  that  country  than  is  the 
price  of  wheat  governed  by  the  amount  of  wheat  which 
happens  at  any  moment  to  be  stored  in  that  country. 
It  is  the  world's  supply  and  demand  which  must  be 
taken  into  account  in  fixing  the  world  value  of  either 
gold  or  wheat.  The  value  of  gold  in  any  one  country 
cannot  long  deviate  (friction  to  some  extent  apart) 
from  the  world  value. 


LOWERING  THE  STANDARD  AND  PRICES     185 

It  is  apparent,  then,  that  the  real  purpose  of  the 
talk  about  increasing  the  quantity  of  money  and  thereby 
raising  prices  can  be  accomplished  only  by  some  action 
which  depreciates  the  standard.  To  increase  the  quan- 
tity of  standard  money,  without  changing  its  value, 
would  not  affect  prices  expressed  in  that  standard. 
It  has  been  already  shown  how  impossible  it  would  be 
to  affect  prices  by  this  partial  means.  Then,  it  fol- 
lows that  the  free-coinage-of-silver  or  paper-money 
propaganda  can  effect  its  end  of  raising  prices  only  by 
lowering  the  standard.  That  is  the  pith  of  a  whole 
group  of  schemes  which  has  arisen  out  of  the  money 
agitation.  If  this  be  admitted,  the  method  is  ob- 
viously fraudulent  and  dishonest;  and  many  con- 
scientious persons  who  hold  the  need  for  money  to 
be  imperative  would  be  the  last  to  continue  to  sup- 
port it. 

§  4.  But  objectors  may  say  that  the  case  against 
the  quantity  theory  is  not  fully  made  out;  that  it  may 
still  be  true  that  prices  are  dependent  upon  the  vol- 
ume of  the  currency.  It  is  known  that  the  quantity 
theory  has  been  upheld  by  well-known  economists. 
Nay,  more,  many  text-books  of  political  economy  teach 
it  in  more  or  less  guarded  form;  it  has  been  used  in 
countless  pamphlets  and  books  to  support  the  demand 
for  additional  issues  of  silver  or  paper  whenever  an 
author's  statements  could  be  quoted.  Indeed,  it  is 
a  common  belief,  assimilated  into  the  consciousness 


1 86  MONEY  AND   PRICES 

of  the  general  public,  that  prices  depend  directly  upon 
the  relation  between  the  money  work  and  the  volume 
of  money  in  circulation  (i.  e.,  not  upon  the  ratio  of 
goods  to  the  standard,  but  to  the  quantity  of  the  media 
of  exchange).  I  believe  this  to  be  a  theory  not  only 
unsound  in  principle,  but  also  unsupported  by  the 
facts  of  trade  and  prices.  However,  let  us  grant  its 
truth,  and  see  what  comes  of  it. 

All  prices  do  not  move  at  any  time  either  in  the 
same  direction  or  all  together;  some  are  rising  while 
others  are  falling;  some  remain  fairly  stationary, 
while  others  rise  or  fall  excessively.  Indeed,  there  are 
countless  influences  arising  in  any  one  industry  which 
modify  its  methods  of  production  and  sale  and  change 
the  market  price  of  its  goods.  Moreover,  the  business 
of  a  country  often  expands  in  special  groups  of  indus- 
tries; at  one  time  (as  before  1873)  it  may  be  in  rail- 
ways, at  another  (as  after  1880)  it  may  be  in  agricul- 
ture. When  a  crisis  comes,  it  strikes  most  severely 
those  industries  in  which  there  has  been  the  most  over- 
trading, while  others  suffer  by  sympathy,  but  less  seri- 
ously. In  short,  any  general  level  of  prices  is  an  aver- 
age of  all  prices,  some  of  which  are  high,  some  low. 
It  is  like  speaking  of  an  average  height  of  soldiers  in 
our  army;  it  is  an  abstraction,  not  a  fact.  There 
is,  moreover,  a  necessary  opposition  of  interests;  the 
woollen  manufacturer,  for  instance,  does  not  wish  wool 
to  be  high  in  price,  while  that  is  exactly  what  the  wool- 
grower  earnestly  hopes  for.    That  is,  a  general  change 


LEGISLATIVE   FAVORS  TO  DEBTORS       187 

of  price  would  necessitate  a  readjustment  of  expenses 
to  selling  prices  upon  the  new  level,  and  the  strong 
would  gain  at  the  expense  of  the  weak  during  the  period 
of  transition. 

But,  as  every  tyro  knows,  after  the  new  level  of 
prices  has  been  reached,  every  article  bears  the  same 
relative  value  to  other  articles  as  before.  The  only 
change  is  in  the  number  of  price  units  in  which  goods 
are  counted.  During  the  process  of  change,  however, 
from  a  low  to  a.high  level  of  prices,  an  alteration  has 
been  made  of  a  serious  nature  in  the  relations  between 
debtors  and  creditors.  Indeed,  the  only  lasting  effect 
of  a  change  in  the  price  level  is  upon  contracts  and 
indebtedness.  As  a  fall  of  prices  inures  to  the  bene- 
fit of  creditors,  a  rise  of  prices  would  inure  to  the 
benefit  of  debtors.  If  it  would  be  wrong  to  have 
legislation  favoring  the  creditor  class,  so  it  would  be 
to  have  legislation  favoring  the  debtor  class.  If  more 
money  were  to  be  issued  by  the  state  in  order  to 
raise  prices,  that  would  be  legislation  in  favor  of  one 
set  of  persons  at  the  expense  of  another  set.  But  the 
disposition  to  concede  legislative  favors  to  debtors  is 
in  its  essence  an  attempt  by  government  paternal- 
-  ism  to  redistribute  from  those  who  have  to  those  who 
have  not.  It  is  a  means  of  supplementing  individual 
incapacity  and  want  of  success  by  assessment  upon  the 
efficient  and  successful  members  of  society.  This  is 
socialism  pure  and  simple.  It  is  following  the  ten- 
dency to  look  to  the  state  for  aid  when  individual 


1 88  MONEY  AND  PRICES 

effort  begins  to  be  distasteful;  it  removes  the  incentive 
to  industry  from  those  weaklings  who  need  to  know 
that  success  is  not  the  fruit  of  idling  and  shiftlessness. 
To  let  such  as  these  feel  that  their  inefficiency  may 
be  condoned  by  the  collective  efforts  of  society  is  to 
penalize  thrift  and  put  a  premium  on  failure.  To 
legislate  in  favor  of  the  inefficient  at  the  expense  of  the 
efficient  is  to  put  demagoguery  on  the  throne  and  dis- 
courage the  very  qualities  on  which  the  stability  and 
moral  growth  of  society  always  has,  and  always  must, 
depend. 

Think  of  a  civil  polity  which  in  the  interest  of  one 
set  of  persons  should  undertake  to  regulate  the  prices 
of  goods  in  the  country's  markets — whenever  intem- 
perate overtrading  has  been  followed  by  a  commer- 
cial crisis,  or  an  abundant  crop  and  a  small  foreign 
demand  has  lowered  the  price  of  wheat  or  cotton !  If 
we  are  to  enter  upon  that  path,  it  is  well  to  know  whither 
it  leads.  One  such  step  in  socialism  leads  to  another, 
and  the  outcome  is  the  subversion  of  existing  society. 
That  may  be  a  consummation  to  be  wished  for;  but, 
at  least,  we  should  enter  upon  it  with  open  eyes  and 
understanding  minds. 

§  5.  In  studying  the  outcome  of  the  price  question, 
we  are  finally  brought  to  an  obvious  dilemma.  On  one 
horn  we  find  that,  if  the  quantity  theory  is  unsound, 
then  attempts  to  raise  prices  by  expanding  the  cur- 
rency will  be  futile;   or,  if  prices  are  to  be  raised  at 


THE  QUANTITY  THEORY  189 

any  cost,  it  can  be  done  only  by  measures  directed  to 
changing  the  value  of  the  standard  itself  in  which  prices 
are  expressed.  The  last  is  a  kind  of  open  fraud  such  as 
was  practised  by  bankrupt  sovereigns  when  they  de- 
based their  coinage  to  lighten  their  indebtedness,  and 
would,  in  these  days  of  light  and  liberty,  be  no  more 
permitted  to  a  sovereign  people  than  it  was  in  days 
gone  by  to  a  sovereign  despot.  Such  measures  would 
not  be  adopted  on  his  own  initiative  by  an  individual 
man  of  affairs,  because  to  compound,  or  to  scale,  his 
debts  would  ruin  his  credit  and  his  business  reputation; 
but  should  the  state  enable  him,  by  an  immoral  law, 
to  do  legally  that  which  he  would  shrink  from  doing 
on  his  own  responsibility  ?  Therefore,  it  is  the  more 
incumbent  on  the  state  in  its  legislation  to  strictly 
observe  the  right,  so  that  it  may  not  encourage  im- 
moral acts  by  its  citizens  through  its  own  example. 

On  the  other  horn  of  the  dilemma,  if  the  quantity 
theory  is  sound,  if  it  is  possible  to  regulate  prices  by 
government  control  of  the  quantity  of  money — we 
have  socialism  pure  and  simple.  Which  horn  shall 
we  take?  Shall  we  accept  dishonor,  or  shall  we  dis- 
appear down  the  unknown  path  of  socialism?  One 
or  the  other  must  we  choose,  if  the  public  is  pleased  to 
occupy  itself  in  the  future  with  the  price  question. 
Yet,  if  we  think,  if  we  see  the  repugnant  outcome  of 
this  delusion,  it  should  be  unnecessary  to  choose  either. 
And  so  soon  as  the  forces  operating  on  price  are  un- 
derstood to  be  complex,  and  of  a  nature  not  to  be  in- 


i  go  MONEY  AND  PRICES 

terfered  with  by  legislation,  we  shall  be  freed  from  a 
dangerous  agitation. 

If  we  recognize  the  important  socialistic  element  in- 
volved in  the  price  question,  we  may  readily  believe 
that  it  was  not  merely  an  unshaken  belief  in  the  free 
coinage  of  silver  which  guided  the  votes  of  millions 
of  our  citizens  in  1896.    The  general  cause  lay  deeper 
than  the  superficial  means  used  to  satisfy  the  desire 
for  state  help.    A  demand  for  free  coinage  of  silver 
was  but  one  manifestation  of  a  general  conception  of 
government.    It  was  one  evidence  of  the  tendency  to 
lean  upon  the  state  for  outside  help  whenever  internal 
character  and  ability  failed  to  satisfy  the  cravings  of 
the  less  efficient.    Let  the  silver  agitation  die  out — 
as  it  is  likely  to;   but  the  underlying  cause  will  still 
find  some  other  form  of  activity.     So  long  as  the  price 
question  in  any  form  keeps  the  stage,  if  it  does  not 
play  the  role  of  silver,  it  may  appear  in  the  guise  of 
paper  money.    All  that  has  been  said  applies  equally 
well  to  a  paper-money  agitation.     Consequently,  the 
best  means  of  overthrowing  fallacious  monetary  argu- 
ment of  this  kind  are  really  to  be  found  in  methods 
which  counteract  the  socialistic  tendencies  contained 
in  it.    The  demand  for  cheap  money  in  any  form  is 
an  outcome  of  the  desire  to  get  rich  without  work,  to 
get  wealth  without  going  through  the  necessary  proc- 
esses of  producing  it;    or  to  arrange  political  legisla- 
tion so  that  those  who  have  produced  largely  shall  be 
obliged  to  hand  over  a  share  to  those  who  shrink 


MONETARY  POLITICAL  ISSUES  191 

from  meeting  the  exactions  of  the  productive  process. 
This  is  the  originating  motive  behind  the  demand  for 
a  graduated  income  tax.  Hence  it  is  certain  to  appear 
in  the  same  platforms  wherein  are  found  pleas  for  free 
coinage  of  silver,  or  for  an  expansion  of  the  paper  cur- 
rency. These  analyses  explain,  also,  why,  when  pros- 
perity returns,  less  and  less  is  heard  of  all  these  nos- 
trums; because,  when  it  is  easy  for  all  sorts  of  per- 
sons to  get  employment  and  a  means  of  subsistence, 
less  urgent  are  the  appeals  to  the  outside  help  of  the 
state.  And  with  the  certainty  of  the  tides  will  they 
reappear  on  the  return  of  a  wave  of  depression  follow- 
ing upon  commercial  expansion  and  overtrading.  An 
understanding  of  these  oscillations  of  prosperity  and 
depression  enables  clever  politicians  to  put  themselves 
in  front  of  the  tide  on  an  issue  which  appeals  to  the 
numerous  but  unthinking  mass.  So  has  it  always 
been  from  the  time  of  Cleon  to  the  present  day. 

§  6.  The  coming  political  issues  in  the  United  States 
are  likely  to  be  inspired  more  and  more  by  the  under- 
lying causes  which  have  given  us  free  coinage  of  silver 
and  greenbackism,  but  it  does  not  at  all  follow  that 
they  will  continue  to  be  of  a  monetary  character.  So 
long  as  the  price  delusion  remains,  doubtless  some 
phase  of  the  money  question  will  appear  as  a  political 
issue.  But  this  will  not  be  the  essential  element; 
sooner  or  later,  the  United  States  must  face  the  in- 
evitable political  issue  between  the  socialistic  and  the 


192  MONEY  AND  PRICES 

non-socialistic  conceptions  of  government.  Already 
our  national  issues  have  assumed  more  of  this  char- 
acter. European  countries  have  for  years  had  to  put 
forth  most  strenuous  effort  in  the  political  struggle  to 
maintain  the  existing  ideas  of  government  and  prop- 
erty. We  cannot  escape  the  coming  issue  in  the 
United  States.  In  the  past,  political  leaders  have  very 
skilfully  made  and  pushed  to  the  front  those  issues 
which,  under  the  circumstances,  would  best  serve  their 
personal  ambitions.  It  is  really  astonishing  how  suc- 
cessfully a  few  men  in  charge  of  the  respective  parties, 
by  adroit  management,  keep  down  this  issue  and  put 
up  that,  and  force  a  decision  upon  them  in  the  cam- 
paigns. Yet  sometimes  the  stream  will  break  over 
its  barriers.  In  1896,  for  example,  the  long-repressed 
socialistic  spirit  refused  to  be  controlled,  and  spread 
itself  over  the  Chicago  platform.  The  particular  form 
in  which  the  issues  were  presented  was  not  the  most 
significant  thing,  but  the  final  appearance  of  the  un- 
derlying cause  itself  in  national  politics.  It  was  not 
merely  the  free  coinage  of  silver,  or  the  attacks  upon 
the  Supreme  Court,  which  created  an  epoch-making 
year  in  American  politics,  but  it  was  the  first  open 
appearance  of  a  socialistic  theory  of  government, 
which  happened  to  emerge  in  the  guise  of  the  price 
question. 

Hence  it  is  to  be  expected  that  instead  of  free  coin- 
age of  silver,  or  paper-money  expansion,  new  issues 
will  be  presented  to  take  their  place,  which  will  have 


CRUSADE  AGAINST  CORPORATIONS       193 

the  same  general  purpose  as  the  old  ones.  This  is 
why  the  remark  of  a  prominent  political  manager  in 
Illinois  is  perfectly  consequent:  "I  care  very  little  for 
silver  in  itself;  but  I  am  for  the  masses  against  the 
plutocrats."  Therein  lies  the  essence  of  the  whole 
matter.  It  is  no  longer  necessary  to  hold  to  past 
party  declarations  for  silver;  that  issue  is  not  essen- 
tial to  rally  the  same  elements  of  society  around  some 
other  platform  equally  socialistic,  but  specifically  new. 
Struggles  about  wages  and  a  larger  share  of  labor  in 
industry  are  sure  to  come. 

The  point  of  view  which  was  met  by  the  socialistic 
nature  of  the  price  question  will  be  equally  satisfied  by 
such  rallying  cries  as  anti-monopoly.  The  crusade 
against  corporations  is  promising,  not  only  because  it 
jumps  with  the  social  philosophy  of  certain  classes,  but 
because  the  open  display  of  legislative  corruption  di- 
rectly traceable  to  a  few  arrogant  corporations  makes 
the  general  situation  of  all  corporations  assailable. 
Indeed,  the  unblushing  methods  adopted  in  granting 
favors  to  large  interests  by  legislation,  both  in  Con- 
gress and  in  State  Legislatures,  give  occasion  for  the 
attacks  of  the  "masses  against  the  plutocrats,"  and  the 
ruthless  corporations  have  themselves  to  blame  if 
their  acts  give  occasion  for  angry  reprisals  on  the  part 
of  the  less  successful  portions  of  society.  The  system 
by  which  manufacturers  in  certain  industries  are  prac- 
tically permitted  to  fix  the  customs  duties  on  their  own 
products  is  criminally  wrong.     It  is  as  bad  as  allowing 


i94  MONEY  AND  PRICES 

contested  cases  in  court  to  be  decided  by  only  one  of 
the  interested  parties.  In  the  great  case  of  the  pro- 
ducers versus  the  consumers,  the  latter  are  wholly  ig- 
nored, and  the  verdict  is  rendered  against  them  almost 
without  a  hearing,  and  in  the  terms  fixed  by  the  op- 
posing party  to  the  suit.  The  passage  of  a  great  tariff 
bill  is  a  pitiful  display  of  selfish  grab,  and  the  prizes 
are  won  by  the  most  unscrupulous,  by  those  with  the 
longest  purses.  How  long  can  any  form  of  govern- 
ment satisfy  the  masses  who  look  upon  these  shame- 
less scenes?  Instead  of  regarding  such  wrongs  as 
excrescences  on  a  good  constitution  and  capable  of 
cure,  it  is  but  natural  for  them  to  regard  the  whole 
organism  as  unsound,  and  therefore  not  worth  preser- 
vation. The  masses  do  not  discriminate;  they  strike 
hard  and  cruelly  at  the  supposed  wrong  in  the  large. 

The  corporation  and  large  accumulations  of  capital 
under  one  management  have  a  perfectly  legitimate 
place  in  the  industrial  and  social  economy  and  they 
have  come  to  stay.  They  are  as  certain  to  remain  in 
the  world  of  industry  as  electricity  among  the  motive 
powers;  and  they  will  no  more  be  dispensed  with  be- 
cause some  evils  have  sprung  up  in  their  management, 
than  electricity  will  be  dropped  because  its  new  power 
has  not  been  fully  harnessed  and  lives  are  sometimes 
lost  thereby.  The  present  expansion  of  industry  and 
the  enlarged  employment  of  labor  would  be  impossible 
without  the  corporation.  Without  it,  great  docks, 
gigantic  ships,  vast  bridges,  irrigation  canals,  and  the 


PRODUCTION  AND  THE   CORPORATION     195 

like,  would  not  be  constructed.  By  means  of  the  cor- 
poration small  investors  are  able  and  willing  to  put  at 
risk  little  sums,  which,  collected  from  many,  make  a 
vast  capital,  such  as  is  seldom  owned  by  one  man,  or, 
if  it  were,  would  not  be  put  at  hazard  in  one  untried 
enterprise.  Large  production,  moreover,  is  a  means 
of  economy  and  gain.  Hence,  large  production  in  in- 
dustry and  the  stock  company,  or  corporation,  have 
mainly,  in  the  present  century,  grown  up  together.  It 
is  a  matter  of  course  that  such  industrial  changes,  such 
new  forms  of  organization,  should  bring  with  them 
new  problems  and  new  difficulties  as  well  as  new 
gains.  But  it  is  as  childish  to  think  of  driving  corpora- 
tions out  of  existence  as  to  abolish  steam-engines  be- 
cause they  sometimes  blow  up. 

Whatever  the  special  issue,  we  shall  have  to  cope 
with  socialistic  forces  in  one  form  or  another.  This  is 
not  necessarily  a  ground  for  serious  alarm;  but  we 
must  keep  in  mind  that  these  questions  are  less  easily 
met  by  a  democracy  than  by  a  monarchy.  It  is  true 
that  in  the  United  States  property  is  more  widely  dif- 
fused than  in  the  older  nations  of  Europe,  and  the 
solid  good  sense  and  intelligence  of  the  American  voter 
can  always  be  relied  upon  in  an  emergency,  or  whenever 
a  great  issue  has  thoroughly  stirred  the  country.  But, 
on  the  other  hand,  it  must  be  remembered,  as  Sir 
Henry  Maine  has  pointed  out,  that  democracy  is  the 
most  difficult  form  of  government.  Consequently,  our 
people  must  be  more  acute,  more  wise,  more  sensible 


196  MONEY  AND  PRICES 

and  more  judicial  in  their  settlement  of  these  questions 
of  government,  than  their  brothers  under  other  forms 
of  society.  And  the  press  and  the  magazine  have  a 
heavier  responsibility  with  us  than  elsewhere  to  guide 
and  enlighten  thinking,  rather  than  to  debauch  it  for 
purposes  of  political  gain. 


CHAPTER  VIII 
A  MONETARY  SYSTEM   FOR   SANTO   DOMINGO 

§  i.  In  the  summer  of  1893  the  President  of  Santo 
Domingo  urged  upon  friends  interested  in  the  finances 
of  that  state  the  necessity  of  speedy  action  to  aid  in 
escaping  the  disasters  due  to  the  fall  in  the  price  of 
silver.  The  fluctuations  of  foreign  exchange,  and  the 
excessive  reductions  in  the  revenues  of  the  state  con- 
sequent upon  the  depreciation  of  the  standard,  were 
the  matters  then  most  prominently  at  issue.  The  ac- 
tion of  India  in  closing  its  mints  and  of  the  United 
States  in  repealing  the  Sherman  Act  in  1893  no  doubt 
had  an  influence  upon  the  situation,  but  mainly 
through  the  resulting  distress  produced  by  the  con- 
tinuing depreciation  of  silver.  At  this  time  over- 
tures were  made  to  the  writer  to  frame  a  monetary 
scheme  which  would  relieve  the  country  from  its  diffi- 
culties; and,  of  course,  the  study  of  the  situation  de- 
manded a  visit  to  the  country  and  an  adaptation  of 
the  scheme  to  existing  conditions.  It  was  finally  de- 
cided that  the  journey  should  be  made  early  in  the 
year  1894.  This  plan  was  carried  out  in  the  months 
of  February  and  March  of  that  year.  The  scheme, 
as  finally  agreed  upon,  passed  the  Dominican  Con- 
gress, and  became  a  law  April  28,  1894.     In  answer  to 

197 


198  MONEY  AND  PRICES 

several  requests  it  has  been  thought  fit  to  preserve  the 
law  as  passed1  verbatim,  with  the  proper  explanations, 
as  materials  for  the  study  of  an  important  phase  of 
monetary  development.  There  has  since  arisen  an 
additional  reason  for  placing  this  Dominican  plan  on 
record  in  that  much  has  been  heard  of  the  "  gold-ex- 
change standard"  proposed  for  Mexico  and  China. 
In  effect,  the  recent  proposals  deal  with  essentially 
the  same  monetary  problem  as  that  in  Santo  Domingo, 
and  for  which  this  solution  was  given  in  1894,  long 
before  the  "gold-exchange  standard"  was  brought 
forward  as  something  modern. 

§  2.  The  government  of  Santo  Domingo  should  be 
clearly  distinguished  from  that  of  Haiti,  which  is  on 
the  same  island.  The  Country  of  Toussaint  l'Ouver- 
ture,  the  large  island  next  east  of  Cuba,  is  separated  by 
the  Mona  Passage  on  the  east  from  Porto  Rico;  it 
possesses  an  unequalled  soil,  and  a  vegetation  and 
climate  of  subtropical  regions  tempered,  however,  by 
the  surrounding  ocean.  The  western  third — roughly 
speaking — occupied  by  the  Haitians  is  practically 
separated  by  natural  geographical  boundaries  from  the 
Republic  of  Santo  Domingo,  which  extends  over  the 
eastern  two-thirds.2  The  "Black  Republic"  of  Haiti 
stands  quite  by  itself,  and  no  love  is  lost  between  it 

1  A  brief  and  popular  exposition  of  the  law  was  given  in  the  Atlantic 
Monthly  for  July,  1894,  from  which  short  extracts  may  be  found  in  the 
present  chapter.  For  the  text  of  the  law,  as  translated  from  the  Spanish 
in  the  Official  Gazette,  see  Appendix  I. 

2 18,045  square  miles. 


INHABITANTS  OF  SANTO  DOMINGO      199 

and  the  Dominican  Republic,  and,  if  we  except  the 
desultory  smuggling  over  the  mountain  boundaries, 
the  only  ordinary  means  of  communication  between  the 
two  countries  is  by  sea.  It  will  be  clear,  therefore,  in 
this  matter,  that  we  have  no  concern  whatever  with 
Haiti.     Its  people  and  its  currency  are  sui  generis. 

The  color-line  in  Haiti  is  drawn  against  the  white 
man;  in  Santo  Domingo  it  practically  does  not  exist. 
A  population  of  about  400,000/  amalgamated  of  Span- 
ish, Indian,  and  negro  blood,  possesses  the  character- 
istics of  all.  Energy,  persistence,  and  punctuality  are, 
of  course,  not  superabundant;  but  the  people,  while 
naive  and  hospitable,  are  intelligent.  Anglo-Saxon 
habits  of  trade  and  commerce  would  sometimes  be 
shocked.  Yet  a  general  and  wide-spread  respect  for 
pecuniary  obligations  exists.2  While  it  is  often  in- 
ferred from  the  midday  closing  of  shops  that  the  peo- 
ple are  indolent,  yet  the  richest  merchant  on  the  island 
appears  in  his  counting-house  at  five  o'clock  in  the 
morning,  and  will  be  found  there  as  late  as  others. 

French  and  Spanish  lines  of  steamships  regularly 
call  at  Dominican  ports;  but  the  principal  commerce 
of  the  country  is  carried  on  with  the  United  States, 
transported  by  an  American  line  of  steamers,  used 
chiefly  for  freight.     Most  articles  of  daily  consump- 

1  The  statements  in  the  Handbook  of  Santo  Domingo  (Bureau  of  American 
Republics)  are  to  be  taken  with  much  allowance. 

-  I  was  credibly  informed  that  the  pagaris,  by  which  the  importers  pay 
customs  duties  and  thus  secure  credit  for  a  few  months,  have  in  no  instance 
been  defaulted  at  maturity. 


200  MONEY  AND  PRICES 

tion  are  imported,  the  island  not  engaging  in  manufac- 
tures to  speak  of.  Of  course,  coffee,  cacao,  sugar, 
tobacco,  fruits,  vegetables,  honey,  fowls,  goat's  meat, 
charcoal,  pigs,  and  the  like  are  produced  at  home. 
On  the  banks  of  the  Ozama  one  may,  any  afternoon, 
see  the  natives  paddling  down  in  canoes,  loaded  with 
these  products,  in  the  same  manner  in  which  goods 
have  been  transported  for  three  or  four  centuries  past. 
A  great  valley,  the  Cibao,  runs  through  the  Dominican 
country  from  Samana  Bay  at  the  east,  to  Monte 
Christi  at  the  northwest,1  with  fine  mountain  chains 
on  the  north  and  south,  enclosing  a  splendidly  fertile 
region,  or  Vega  Real,  planted  with  cacao,  bananas, 
plantains,  and  royal  palms  in  the  eastern  half.  North 
of  the  Cibao  is  a  slender  strip  of  land  between  the 
mountains  and  the  Atlantic,  holding  the  only  northern 
port,  Puerto  Plata,  at  the  base  of  a  mountain,  2,700 
feet  high.  A  great  quantity  of  goods,  heavy  and  light, 
are  carried  mule-back  from  Puerto  Plata  over  unspeaka- 
ble roads  winding  over  the  mountains  to  Santiago  the 
principal  city  of  the  Cibao  of  about  16,000  inhabitants. 
It  is  no  mean  achievement  to  get  a  piano  or  a  steam- 
boiler  to  Santiago.  South  of  the  Cibao  runs  the 
highest  mountain  chain,  which  leaves  between  it  and 
the  Caribbean  a  very  fertile  plain,  in  which  are  the 
principal  sugar-plantations  and  the  capital,  Santo 
Domingo  City,  at  the  mouth  of  the  Ozama  River. 

1  From  Cape  Engano  at  the  east  to  the  Haitian  frontier  is  about  260 
miles.  At  its  greatest  breadth  the  island  is  165  miles.  The  Cibao  is  about 
140  miles  long  and  14  wide. 


SUGAR,  TOBACCO,  AND  CACAO     201 

East  of  the  Ozama,  which  is  embowered  in  luxuriant 
subtropical  vegetation,  there  is,  about  Macoris,  the 
land  best  adapted  for  sugar-growing.  Here  are  to  be 
found  great  estates,1  containing  many  thousands  of 
acres,  with  the  most  approved  modern  machinery, 
each  employing  in  many  cases  500  to  800  laborers. 
The  sugar  industry  is  the  animating  one  of  the  coun- 
try. In  this  region  of  the  south  and  in  the  capital  are 
to  be  found  a  large  laboring  population;  while  in  the 
Cibao  the  Spanish  blood,  still  more  or  less  intact, 
makes  the  aristocracy  of  the  country. 

In  the  Cibao  and  at  the  north  is  found  the  principal 
tobacco  cultivation,  the  trade  in  which  centres  largely 
in  one  house  at  Puerto  Plata.  The  quality  is  not 
equal  to  that  of  Cuba,  and  is  mostly  sent  to  Germany 
to  be  used  for  covers.2  The  eastern  portion  of  the 
Cibao  is  finely  adapted  to  the  growth  of  cacao  and 
coffee.  The  cacao-tree  bears  in  five  or  six  years  after 
planting;  and  full-grown  trees  have  been  known  to 
bear  as  many  as  250  mazourkas — the  mazourka  being 
the  fleshy  pod  containing  the  beans — although  the 
average  is   only  about  55.    The  cacao3  is  marketed 


'There  are  said  to  be  twenty-one  sugar  estates,  valued  at  $11,800,000, 
spending  annually  $1,600,000.    The  exports  are  reported  as  follows: 

Quintals 
Year  (ofit2lbs.) 

1881 144,004 

1889 450,825 

1891 324.050 

But  these  figures  are  not  to  be  wholly  relied  upon. 

1  In  1891,  68,077  quintals  were  exported. 
•Exports  in  1891  were  13,218  quintals. 


202  MONEY  AND  PRICES 

chiefly  at  Havre  or  Hamburg,  and  in  these  days  of 
increasing  chocolate-drinking  finds  a  ready  sale. 

Some  years  ago  Scotch  capitalists  built  a  railway 
from  Sanchez,  on  Samana  Bay,  at  the  east,  into  the 
Cibao  as  far  as  La  Vega,  or  about  62  miles.  And 
more  recently  a  Dutch  company  began  to  build  an- 
other from  Puerto  Plata,  southward  to  Santiago  over 
the  mountains;  but  after  building  13  miles  inland  to 
Bajabonico,  the  attempt  was  abandoned.  In  1894  the 
San  Domingo  Improvement  Company,  of  New  York, 
undertook  the  completion  of  this  railway  from  Baja- 
bonico to  Santiago,  and  probably  also  from  Santiago 
to  Mocha.  The  railways  are  owned  by  the  govern- 
ment, bonded  as  they  are  built  to  a  moderate  extent, 
and  operated  by  the  builders  under  a  contract. 

Telegraph-lines  connect  the  various  cities  of  the 
country;  and  by  cable  to  Curacao,  and  thence  to  La 
Guayra  in  Venezuela,  or  by  cable  from  the  Mole  St. 
Nicholas  to  Santiago  de  Cuba,  they  connect  with  the 
outside  world.  Telegraphic  communication,  therefore, 
exists  with  the  markets  of  America  and  Europe.  The 
Clyde  Line  of  steamers  give  regular  local  passenger 
transportation  from  port  to  port,  beginning  at  Monte 
Christi  on  the  northwest,  and  touching  successively 
at  Puerto  Plata,  Samana,  Sanchez,  Macoris,  Santo 
Domingo  City,  and  Azua;  repeating  the  route  on  the 
return  trip  to  New  York.  Inland  transportation— 
except  by  the  Sanchez  railway— is  accomplished  wholly 
on  horseback.    No  carriage  or  wagon  roads  exist.    In 


FINANCIAL  SITUATION  203 

some  regions,  of  course,  about  sugar  estates  or  in  the 
places  about  Monte  Christi,  at  the  mouth  of  the 
Yaqui  River,  in  carrying  logwood,  rough  bull-carts 
are  used.  To  be  sure,  a  badly  abraded  horseman  might 
find  a  solitary  dog-cart  in  Santiago  to  carry  him  over 
dubious  roads,  but  the  foothills  would  give  him  pause. 

§  3.  After  this  conspectus  of  the  general  conditions 
of  the  country,  which  gives  the  background  for  our 
experiment,  a  brief  statement  may  be  given  of  the 
financial  and  monetary  situation  which  led  up  to  the 
new  legislation  of  1894. 

About  the  time  of  the  American  Civil  War,  the 
Dominicans,  in  a  last  struggle  with  Spain,  completely 
established  their  independence.1  The  constant  petty 
warfare  with  the  Haitians  also  soon  came  to  an  end. 
The  republican  form  of  government  gave  play  for  a 
struggle  of  brains  and  leadership,  in  which  the  strongest 
man  generally  won.  For  several  terms  the  President, 
in  1894  General  Ulisses  Heureaux,  had  been  re-elected. 
Although  governing  with  a  firm  hand,  under  his  rule 
telegraphs  and  railways  had  been  introduced,  and  in- 
cipient revolutions  were  thereby  more  easily  discovered 
and  more  quickly  crushed.  To-day  any  stranger  can 
ride  the  length  and  breadth  of  the  land  in  perfect  safety. 

In  1888  the  public  finances  were  said  to  be  in 
a  condition  which  was  far  from  satisfying  the  require- 
ments of  budgetary  science.     At  that  time,  the  CUS- 

1  July  u,  1865. 


2o4  MONEY  AND  PRICES 

toms  revenues  were  collected  by  a  Dutch  company 
under  a  contract  with  the  state.  Since  that  date  the 
revenues  seem  to  have  decreased.  Early  in  1893,  the 
public  debt  was  consolidated,  and  a  new  contract1 
made  with  an  American  company,  known  as  the  San 
Domingo  Improvement  Company,  of  New  York,  by 
which  the  custom-houses  were  to  be  transferred  to  their 
charge.  Under  the  new  regime,  inefficiency  and  pos- 
sible corruption  had  been  reduced  to  a  minimum,  and 
the  revenues  had  begun  to  increase.  This  means,  of 
course,  that  there  was  more  or  less  income  to  spend 
on  railways,  interest,  redemption  of  the  public  debt, 
and  the  like. 

The  duties  on  imports,  being  about  40  per  cent., 
were  payable  in  current  silver  coin.  For  years  the 
Mexican  silver  dollars  were  the  only  coins  in  circula- 
tion. On  July  16,  1890,  a  law  was  passed  by  which 
a  new  Dominican  coinage  was  established,  under  a 
concession  to  a  French  institution,  known  as  the 
Banco  Nacional  de  Santo  Domingo,  15  Place  Vendome, 
Paris.  This  concession  granted  it  the  right  to  coin 
money ;  and  in  the  performance  of  this  right  a  coinage 
law  had  been  passed,  creating  a  monetary  system  of 
silver  in  exact  imitation  of  the  French,  with  denomina- 
tions of  five-franc,  one-franc,  and  half-franc  pieces. 
These  coins  were  exact  counterparts  of  existing  French 
coins,  of  the  same  weight  and  fineness;  but  they  bore 

1  Dated  January   28,   1893,  and  ratified  by  the  Dominican  Congress, 
March  24,  1893. 


FORMER  MONETARY  SYSTEM  205 

the  devices  and  ensignia  of  the  Dominican  Govern- 
ment. The  five-franc  piece  was  expected  to  circulate 
on  the  same  terms  as  the  Mexican  dollar.  In  all, 
950,000  francs  of  this  coinage  were  put  into  circula- 
tion. It  was  soon  evident  that  this  plan  would  not  be 
successful.  The  strongest  legislation  was  provided  to 
enforce  the  use  of  francs  as  the  money  of  account, 
but  to  no  avail.  No  great  amount  ever  entered  into 
circulation ;  and  the  dernier  ressort  was  again  the  Mex- 
ican dollar.  There  was  no  profit  to  speak  of  in  this 
franc  issue;  and  the  single  silver  standard,  even  if  its 
coins  carried  the  country's  escutcheon,  was  no  more 
valuable  or  stable  than  silver  in  any  other  form.  In 
1894  these  coins  seemed  to  have  disappeared  from 
common  circulation,  although  it  was  possible  to  get 
sets  of  them  from  the  bankers. 

The  Dominican  people  had,  then,  only  a  single 
standard  of  silver.  With  it,  their  trade  and  com- 
merce had  suffered  so  severely  that  it  was  the  burning 
question  of  the  day  how  to  remedy  the  difficulties. 
The  matter  had  come  home  to  every  man  on  the  island. 
It  was  the  talk  of  the  day.  And  we  may  now  consider 
what  were  the  difficulties  due  to  the  silver  standard 
under  which  they  were  laboring. 

The  first  and  most  obvious  complaint  was  that  the 
exchanges  fluctuated  so  as  to  demoralize  trade.  Ex- 
change in  Santo  Domingo  is  generally  quoted  on  New 
York,  the  quotation  there  being  in  the  figures  which 
indicate  the  number  of  Mexican  silver  dollars  needed 


206  MONEY  AND  PRICES 

to  buy  ioo  American  gold  dollars.  If  the  exchange 
was  quoted  at  160,  or  185,  or  208,  it  meant  that  160, 
or  185,  or  208  Mexican  dollars,  respectively,  were  the 
equivalents  at  the  banks  for  100  dollars  of  American 
gold.  Consequently,  Dominican  exchange  on  New 
York  fluctuated  to  correspond  with  the  changes  in  the 
price  of  Mexican  silver  dollars  in  the  New  York  mar- 
ket. Mexican  silver  dollars,  however,  outside  of  Mex- 
ico are  only  coined  ingots;  that  is,  they  are  only  forms 
of  silver  bullion,  of  convenient  size  and  of  denned 
weight  and  fineness.  Outside  of  Mexico  they  are 
coins  only  in  name,  but  in  reality  bullion.  They  are 
bought  and  sold  on  the  basis  of  the  pure  silver  con- 
tained in  them;  and,  with  certain  exceptions,  the  de- 
mand for  them  differs  little  from  the  demand  for  silver 
bullion,  their  value  being  determined  in  the  same  way 
as  that  of  bullion.  Some  slight  exception  is  to 
be  made  to  this  statement,  owing  not  merely  to  the 
fact  that  the  cost  of  mintage  gives  the  coin  a  value 
above  the  bullion  in  it,  but  also  to  the  fact  that  in 
this  form  this  particular  coin  has  been  by  usage  pre- 
ferred in  the  Orient  and  in  parts  of  America  to  other 
forms  of  silver.  The  market  value  of  the  Mexican 
silver  dollar,  therefore,  may  vary  slightly  from  its  bul- 
lion value,  because  of  a  greater  or  less  trade  demand 
in  other  and  often  distant  countries.  Too  much  em- 
phasis, however,  should  not  be  put  on  this  point;  for, 
in  the  main,  the  value  of  the  dollar  corresponds  very 
closely  to  its  bullion  value. 


FLUCTUATING  EXCHANGE  207 

The  perturbations  of  trade  arising  from  fluctuations 
in  exchange  have  always  excited  undue  apprehension, 
because,  being  clearly  apparent,  and  observed  by  all, 
they  make  a  great  impression  on  the  mind.  Super- 
ficial phenomena  though  they  be,  to  those  who  cannot 
see  deeper  they  appear  to  be  of  a  fundamental  char- 
acter. It  is  true,  however,  that  fluctuations  in  the 
exchanges  produce  evils  among  a  population  unaccus- 
tomed to  banking  methods  for  the  reason  that  through 
banks  the  evils  may  be  avoided,  and  ignorance  of  banks 
is  an  ignorance  of  necessary  remedies.  An  importer 
into  or  exporter  from  Santo  Domingo  can  always  buy 
or  sell  gold  exchange  immediately  on  the  completion 
of  the  transaction,  so  as  to  wholly  protect  himself.1 
But  they  have  not  always  used  the  means  at  their 
disposal.  And  machinery  which  seems  difficult  of  use 
may  remain  unused  by  a  slow-moving  people,  and  the 
same  results  may  ensue  for  the  time  being  as  if  the 
machinery  were  non-existent.  So  even  though  banks 
could  afford  protection  against  fluctuations  of  exchange, 
such  a  people  would  still  regard  the  fluctuations  as  a 
great  evil. 

1  An  exporter  of  goods  to  Santo  Domingo  could  protect  himself  by  the 
following  method,  mentioned  by  Ellstaetter,  Indiens  Silberwlihrung,  p.  25: 
"Should  a  Manchester  cotton  spinner,  for  example,  accept  an  order  in 
January,  1892,  for  cotton  yarn  to  be  delivered  at  Bombay,  payable  on 
July  1  in  rupees,  he  would  be  entirely  protected  against  any  influence 
arising  from  fluctuations  in  the  rate  of  exchange,  if  he  should  sell  a  corre- 
sponding amount  of  bar  silver  for  the  end  of  June,  1X92,  in  bianco  at  the 
quotation  of  the  day  on  the  London  Exchange.  If  the  rate  of  ezchi 
falls  below  this,  he  loses  on  his  goods  contract,  although  he  gains  by  the 
speculation  in  the  fall  of  silver;  if  the  rate  of  <x<  hange  rises,  then  he  1< 
on  silver,  but  he  gets  a  profit  on  the  delivery  of  the  goods." 


2o8  MONEY  AND  PRICES 

The  situation  in  this  respect  was  curiously  like  that 
in  India.  Indeed  in  many  of  the  reports  on  Indian 
currency  one  need  only  substitute  the  words  "Mexican 
dollar"  for  "rupee"  to  get  a  clear  statement  of  Domini- 
can conditions.  Santo  Domingo,  to  be  sure,  is  only 
five  or  six  days  from  the  New  York  market;  it  has  no 
dominating  central  government  at  a  distance  to  which 
it  must  remit  and  which  is  the  creator  of  bills  drawn 
on  the  dependent  country;  and  its  business  and  popu- 
lation are  far  less  than  that  of  India.  But  the  mone- 
tary conditions  are  almost  exactly  the  same.  Both 
countries  had  long  had  only  a  single  silver  standard, 
and  both  had  been  thoroughly  excited  and  disturbed 
by  the  same  cause— the  fall  in  the  value  of  silver.  In 
India,  however,  there  was  a  larger  body  of  merchants 
keenly  alive  to  international  movements  of  trade 
and  exchange  than  in  the  Spanish-American  republic. 
Apart  from  a  few  leading  merchants  and  planters  in 
Santo  Domingo,  few  would  be  conversant  with  the 
somewhat  intricate  operations  of  the  exchanges  and 
the  consequent  effect  on  prices.  The  result  was  that 
these  few  merchants  dominated  trade  and  prices  to  a 
great  "extent,  irrespective  of  what  was  going  on  in  the 
outside  world.  This,  however,  could  not  be  perma- 
nent. Such  domination  might,  at  the  best,  only  delay 
the  inevitable. 

In  Santo  Domingo,  however,  as  in  India,  the  shrewder 
merchants  easily  used  the  little  arithmetic  needed  to 
convert  a  sum  of  silver  due  them  into  an  equivalent 


COMPARISON  WITH  INDIA  209 

value  in  gold  in  which  the  foreign  payment  must  be 
made.  Of  them  it  is  truly  to  be  said  as  of  the  Indian 
exporters  and  importers:  "In  the  computation,  the 
cost  of  insurance  against  loss  by  the  fluctuations  of 
the  exchanges  is  as  exactly  worked  out  as  the  cost  of 
marine  insurance."  1  In  Santo  Domingo,  as  in  India, 
what  really  disturbed  trade  was  the  uncertainty  pro- 
duced by  the  fluctuations.  The  real  difficulty  lay  not 
in  the  exchanges,  but  in  what  lay  behind  the  exchanges. 

One  may  apply  entirely  to  Santo  Domingo  the  con- 
clusion of  the  British  Indian  Currency  Committee2 
on  the  question  of  fluctuations  of  the  exchange: 

"It  is  said  that  legitimate  trade  is  replaced  by  mere 
speculation  and  gambling.  ...  It  does  not  appear 
to  be  certain,  even  in  the  view  of  those  who  are  most 
strongly  sensible  of  the  mischievous  effect  of  fluctua- 
tions of  exchange,  that  the  volume  of  trade  over  a 
series  of  years  has  been  diminished  from  this  cause, 
though  there  seems  a  common  agreement  that  any 
sudden  or  violent  fluctuation  almost  paralyzes  business 
for  a  time.  It  is  to  be  observed  that  it  is  not  so  much 
the  fall  of  exchange  [in  Santo  Domingo  it  would  be  a 
rise  of  exchange]  which  is  complained  of,  as  the  fluctua- 
tions, whether  in  one  direction  or  the  other.  ...  It 
must  be  remembered  that,  before  the  fall  in  the  price 
of  silver  began,  and  the  fluctuations  in  the  rate  of  ex- 
change depended  upon  it,  the  rates  of  exchange  varied 

1  Karl  Ellstaetter,  Indiens  SilberwUhrung,  p.  25. 

2  Report  of  the  Committee  Appointed  to  Inquire  into  the  Indian  Currency, 
1893,  §§  25,  26. 


210  MONEY  AND  PRICES 

very  considerably  during  particular  years,  though,  no 
doubt,  the  fluctuations  have  been  much  more  frequent 
and  considerable  since  that  time. 

"Upon  the  whole,  it  cannot  be  doubted  that  it  would 
be  well  if  commerce  were  free  from  the  inconveniences 
of  fluctuations  which  arise  from  a  change  in  the  rela- 
tion between  the  standard  of  value  in  India  and  in 
countries  with  which  her  commerce  is  transacted.  It 
must  not  be  assumed  that  the  adoption  of  the  same 
standard  for  the  United  Kingdom  and  India  would 
remove  all  the  disquieting  causes  of  the  disturbance 
of  trade  of  which  complaint  is  made.  If  the  com- 
modity which  lies  behind  the  exchange  transaction  is 
one  that  continues  to  fall  in  relation  to  gold,  the  risk 
which  arises  from  bargains  in  a  falling  market  will  still 
be  present." 

§  4.  The  producers  of  coffee,  tobacco,  sugar,  and 
cacao  were  in  a  peculiar  position;  but  they  form  the 
class  who  produce  almost  the  only  articles  of  export. 
The  sugar  and  cacao  planters,  too,  were  then  almost 
all  foreigners.  The  sugar-plantations  on  the  Carib- 
bean were  large,  equipped  with  the  latest  machinery, 
and  managed  with  great  skill.  Their  sugar  was  sold 
almost  entirely  to  the  United  States,  being  sent  either 
by  the  Clyde  Line,  or  by  sailing  vessels.  For  the  pro- 
ceeds of  their  products,  therefore,  they  drew  on  a 
gold-using  country;  and  to  the  extent  to  which  they 
purchased  American  supplies  they  bought  in  a  gold- 


FALL  IN  SILVER  211 

using  country.  In  a  measure,  therefore,  they  had 
hitherto  escaped  the  effects  of  fluctuations  in  silver. 
But  their  hundreds  of  Dominican  laborers  were  paid 
in  silver,  as  were  also  all  their  dues  to  the  state.1  Here 
the  silver  question  affected  them  seriously;  or,  rather, 
with  the  steady  fall  in  silver  they  had  been  steadily 
getting  their  labor  cheaper  in  comparison  with  the 
metal  (gold)  in  which  they  sold  their  product.  A 
change  therefore  from  silver  to  gold  meant  for  them  a 
readjustment,  and  a  return  more  or  less  to  former 
conditions.  If  they  could  no  longer  pay  their  labor- 
ers in  Mexican  dollars  costing  them  only  50  cents  in 
gold,  and  if  they  must  provide  silver  currency  at  100 
cents  in  gold,  it  was  a  serious  matter.  On  the  face 
of  things,  it  meant  to  them  an  increase  of  100  per 
cent,  in  wages.  But  a  slow  and  uniform  fall  in 
silver  did  not  hurt  them.  They  suffered,  as  well  as 
others  who  drew  bills,  from  uncertainty  in  the  rates 
of  exchange.  A  planter,  drawing  a  bill  on  New  York 
against  a  cargo  of  sugar,  could  sell  that  bill  in  Santo 
Domingo  for  the  Mexican  silver  with  which  to  pay  his 
laborers.  But  if,  as  happened  in  the  winter  of  1893-94, 
Mexican  dollars  fell  in  a  period  of  two  months  from 
56  cents  to  48  cents  in  New  York,  such  a  bill  would 
have  become  of  fluctuating  value;  and  on  a  gold  bill 
of  10,000  dollars,  it  would  have  made  a  difference  of 
about  3,000  Mexican  dollars.     By  waiting  two  months 

1  They  had  no  property  tax,  but  contributed  to  the  state  only  by  export 
duties  on  raw  sugar,  by  port  dues,  or  by  octroi  duties  on  carts  passing 
through  the  city. 


212  MONEY  AND   PRICES 

the  bill  would  have  bought  3,000  more  Mexican  dol- 
lars. Obviously,  the  sugar-planter  would  in  such 
times  hesitate  to  sell  bills  for  silver;  and  yet  he  might 
need  money  for  his  pay-rolls.  Hence  a  falling  price 
of  silver  tended  to  make  bills  on  New  York  scarce  and 
high  in  Santo  Domingo.  The  reverse  would  also  be 
true.  If  silver  rose,  or  if  the  gold  standard  were  to  be 
introduced,  there  was  nothing  to  be  gained  by  holding 
back  bills.  But,  to  a  certain  extent,  the  planter  was 
in  practice  always  betting  whether  silver  would  rise 
or  fall,  when  drawing  bills. 

The  sugar-planters  would  be  affected  in  another  way 
by  the  proposed  gold  standard.  There  is  an  export 
duty  on  raw  sugar,  and  several  port  charges,  which 
fall,  of  course,  on  the  planter.  If  the  same  revenue 
rates  were  exacted  in  gold  as  were  formerly  paid  in 
silver,  it  would  amount  to  doubling  the  duties. 
Naturally,  they  opposed  this  increase  of  payments  to 
the  government  under  the  cloak  of  a  change  to  an  im- 
proved standard  of  payment.  A  compromise,  how- 
ever, was  effected  by  reducing  somewhat  the  rate  of 
duty  when  paid  in  gold. 

What  was  true  of  the  sugar-planter  was,  in  the  main, 
true  of  the  coffee  and  cacao  producer.  The  cacao  is 
marketed  in  Havre,  or  Hamburg,  and  the  grower  can 
draw  at  thirty  days'  sight,  and  of  course  in  gold.  Of 
these  large  producers,  therefore,  as  employers  of  labor 
it  may  be  said  that  they  gained  what  their  laborers 
lost  by  the  steady  fall  in  price  of  silver.    They  sold 


REVENUES  IN  SILVER  213 

for  gold,  and  paid  in  silver.  There  never  was  a  clearer 
illustration  of  well-known  monetary  laws  than  in  this 
phenomenon.  With  a  falling,  or  depreciating  standard, 
employers  of  labor  gain  and  laborers  lose;  with  a  rising, 
or  appreciating  standard,  employers  lose  and  laborers 
gain.  I  shall  return  to  this  later,  after  speaking  of 
prices. 

§  5.  The  second,  and  most  obvious  injury  arising 
from  the  depreciating  standard  was  that  suffered  by 
the  government.  It  was  practically  the  same  difficulty 
encountered  by  India.  Customs  revenues  collected 
in  Mexican  dollars  diminished  exactly  as  silver  fell  in 
value ;  that  is,  they  fell  relatively  to  their  gold-bearing 
obligations  in  other  countries,  and  in  regard  to  all  pur- 
chases in  gold-using  countries.  It  was  not  a  question 
whether  gold  had  or  had  not  appreciated.  The  rev- 
enues were  a  fluctuating  quantity  as  compared  with 
the  articles  to  be  purchased.  As  sugar-planters  gained 
by  a  fall  in  silver,  in  which  they  paid  their  export  dues, 
in  comparison  with  the  gold  for  which  their  products 
were  sold,  the  government  lost.  And  in  order  to  make 
payments,  or  to  meet  the  interest  on  public  debts 
held  abroad,  the  revenues  constantly  became  less  and 
less  sufficient.  As  silver  fell,  the  revenues  shrank. 
The  only  resource  was  to  raise  the  percentage  of  im- 
port duties,  a  measure  which  would  naturally  be  un- 
popular. All  these  conditions  were  particularly  severe 
to  a  government  whether  frugal  or  extravagant. 


214  MONEY  AND  PRICES 

The  adoption  of  a  gold  standard  would  have  the 
effect  of  increasing  the  duties,  if  the  old  silver  rates 
were  retained.  It  would  still  be  a  means  of  increasing 
the  revenues,  even  though  the  rates  of  duties  were  low- 
ered in  percentages.  The  government,  therefore, 
would  have  many  reasons  for  favoring  the  adoption 
of  a  new  standard;  and  for  trying  to  escape  from  the 
evils  of  a  depreciating  silver  standard.  The  credit  of 
the  country,  the  value  of  the  bonds,  the  means  to  build 
railways,  the  improvement  of  harbors  and  rivers,  the 
increase  of  military  and  naval  protection,  the  building 
of  forts,  the  carrying  on  of  internal  improvements — 
all  these  were  concerned  in  the  question  of  gold  and 
silver.  All  the  varied  interests,  moreover,  political 
and  financial,  which  were  necessarily  connected  there- 
with, must  be  considered.  As  a  rule,  these  would  find 
only  disadvantage  in  a  fluctuating,  or  depreciating, 
standard.  In  the  end,  they  must  all  work  for  reform 
— if  the  friction  so  often  present  in  details  could  be 
avoided. 

§  6.  To  the  economist  probably  the  relation  of  the 
silver  standard  to  prices  must  present  the  most  inter- 
est. It  was  so  often  contended  that  silver  had  not 
fallen  as  compared  with  commodities,  but  that  since 
1873  both  commodities  and  silver  had  moved  together 
away  from  gold;  that  it  was  gold  which  had  advanced 
in  value  from  causes  affecting  itself,  while  commodi- 
ties and  silver  had  remained  at  the  old  ratios.    It  is 


GRADUAL   PRICE  CHANGES  215 

not  my  purpose  to  argue  this  point  here;  but  to  state 
the  actual  facts  found  in  Santo  Domingo  which  bear 
upon  the  acceptance  of  the  above  theory.  If  silver 
prices  did  not  change,  or  fell,  then  perhaps  the  change 
was  in  gold;  but,  if  silver  prices  rose,  and  gold  prices 
remained  unchanged,  then  it  was  evidently  silver 
which  had  fallen,  and  fallen,  too,  relatively  to  goods. 

In  countries  like  India  and  Santo  Domingo  it  is  to 
be  noted  that  general  readjustments  of  prices  are  made 
slowly.  In  Santo  Domingo  inertia  went  so  far  for  a 
time  in  preventing  changes  in  prices  that  bankruptcy 
was  quite  general.  Torpid  habits  of  mind  on  such 
questions  left  large  masses  of  people  under  the  domina- 
tion of  a  few  aggressive  merchants  with  a  talent  for 
leadership.  Removed  from  quick  means  of  communi- 
cation with  the  outside  world,  matters  easily  went  on 
for  a  time  unchanged  by  the  external  conditions.  In 
regard  to  a  staple  product,  largely  controlled  by  one 
house,  it  is  said  that  the  same  price  in  silver  was  steadily 
paid  to  producers,  irrespective  of  outside  changes  in 
the  value  of  silver,  because  the  exporting  house  made 
itself  whole  in  this  case  in  the  drawing  of  bills.  Such 
temporary  shifts,  however,  cannot  exist  in  the  face  of 
open  competition.  In  general,  the  operation  going  on 
in  Santo  Domingo  was  almost  exactly  that  described 
by  Nasse  in  regard  to  India,1  as  follows: 

"The  immediate  consequence  of  a  change  in  the  rela- 
tive values  of  the  two  metals,  is  a  corresponding  change 

1  Quoted  by  Ellstaetter,  Indiens  SilbenvUhrung,  p.  32. 


216  MONEY  AND  PRICES 

in  the  value  of  (i)  the  money  circulating  in  countries 
having  a  silver  standard  relatively  to  (2)  that  circu- 
lating in  countries  having  a  gold  standard — which  is 
expressed  in  the  rate  of  exchange.  But  if  the  standard 
of  value  of  a  country  depreciates  in  comparison  with 
that  of  other  lands,  only  exported  and  imported  articles 
will  first  be  affected  in  their  relative  values  by  the 
change.  The  rising  rates  of  foreign  exchange  must 
raise  their  prices.  The  relative  prices  of  other  goods, 
however,  are  not  affected  for  a  considerable  time  by 
the  change  in  the  value  of  the  home,  as  compared  with 
the  foreign,  circulating  medium.  The  wages  of  labor, 
and  a  variety  of  conditions  affecting  the  prices  of 
articles  of  daily  use  are  only  gradually  changed." 

Under  peculiar  conditions,  domestic  prices  in  Santo 
Domingo  for  a  time  withstood  the  changes  in  the  value 
of  the  standard  in  the  outside  world.  But  this  could 
not  continue  indefinitely.  The  power  which  kept  up 
prices  for  a  time  was  a  belief  on  the  part  of  leading 
merchants  that  the  outside  change  in  the  value  of 
silver  was  only  a  passing  phenomenon  and  that  very 
soon  silver  would  rise  again.  This  was  maintained, 
as  has  been  said,  until  great  distress  arose.  But  fin- 
ally, when  the  stress  was  too  great  to  withstand,  even 
the  conservatism  peculiar  to  the  Spanish  mind  gave 
way,  and  prices  rose  with  a  bound,  instead  of  rising 
gradually  as  they  would  have  done  in  open  competitive 
markets.  Then  followed  a  sauve  qui  pent,  in  which  the 
wealthy  looked  out  for  themselves  and  the  ignorant 


SILVER  PRICES  IN  INDIA  217 

lost.1  I  happened  to  arrive  at  Puerto  Plata  at  the 
time  (February  and  March,  1894)  when  this  rise  of 
prices  was  taking  place  under  great  excitement.  Within 
the  previous  twenty  days  the  silver  prices  of  all  goods 
had  advanced  about  thirty  per  cent.2  And  during  my 
stay  on  the  island  they  continued  to  change.  It  thus 
appears  that  silver  had  changed  and  very  decidedly, 
not  only  in  regard  to  gold  but  in  regard  to  commodities. 
From  this  it  would  be  absurd  to  infer  that  gold  had 
appreciated.3 

The  same  results  seem  to  have  appeared  in  India, 
according  to  the  information  given  by  the  Indian  Cur- 
rency Commission.  When  Nasse  wrote  in  1886,  there 
had  been  no  serious  change  of  prices.  But  from  the 
tables  of  prices  of  Mr.  O'Conor,  articles  imported  from 
Great  Britain  fell  in  price  in  India,  but  not  as  low  as 
they  fell  at  home;  that  is,  the  prices  in  India  were 
buoyed  up  by  the  decline  in  the  purchasing  power  of 
the  rupee.     For  example,  mule  twist,  No.  40,  fair,  2d 

1  A  Chinaman  in  Puerto  Plata,  ignorant  of  the  rise  of  prices  decided  upon 
by  the  larger  merchants,  found,  to  his  amazement  and  delight,  that  his 
stock  of  rice  and  other  goods  was  selling  remarkably  well;  indeed,  his  sales 
for  the  day  had  exceeded  any  previous  record.  Leaving  his  empty  shelves, 
he  went  to  an  importer  to  replenish  his  stock.  He  then  discovered  that  he 
could  not  buy  new  goods  for  anything  like  the  price  at  which  he  had  already 
sold.     By  this  method  of  induction  he  learned  to  hate  silver. 

1  This  sudden,  although  deiayed,  movement  in  Santo  Domingo  is  clearly 
contrasted  with  the  constant  comparison  of  silver  with  gold  in  Havana, 
where,  in  a  large  commercial  city,  there  is  ready  and  frequent  intercourse 
with  the  outside  world.  The  streets  were  studded  with  offices  for  exchanging 
gold  into  silver,  the  fluctuations  between  the  two  metals  actually  support- 
ing a  large  class.  In  many  shops,  placards  were  displayed,  giving  daily 
quotations  of  American  gold  in  Spanish  silver. 

3  This,  however,  has  been  asserted  on  the  strength  of  the  stability  of  prices 
in  China.  Cf.  E.  Benj.  Andrews,  Quarterly  Journal  of  Economics,  June, 
1894,  p.  323. 


218  MONEY  AND   PRICES 

quality,  had  fallen,  from  March  i,  1873,  to  January, 
1892,  46.67  per  cent,  as  reckoned  in  gold  in  London. 
In  India  this  imported  article,  reckoned  in  silver,  had 
fallen  only  36  per  cent.;  as  reckoned  in  gold  in  Cal- 
cutta the  price  had  fallen  54  per  cent.1 

As  regards  the  articles  produced  and  sold  in  India, 
expressed  in  silver,  it  is  clear  that  they  have  distinctly 
risen.  Comparing  1861-65  with  1891,  rice  rose  from 
103  to  149;  wheat  from  103  to  135;  jawar  from  122 
to  138;  bajra  from  120  to  137;  ragi  fell  from  149  to 
138;  grain  rose  from  88  to  129;  barley  from  80  to 
131.  The  Indian  Government,2  on  October  5,  1892, 
said :  "  In  the  case  of  wheat  and  rice,  the  only  two  grains 
of  which  the  exports  bear  a  material  proportion  to  the 
local  consumption,  the  wholesale  prices  will  be  largely 
determined  by  the  gold  prices  in  Europe  and  the  rate 
of  exchange  for  the  time  being.  As  regards  the  retail 
prices  of  food  grains,  it  is  worthy  of  notice  that  there 
have  been  loud  and  persistent  complaints,  during  the 
last  three  or  four  years  of  the  high  range  of  prices  of 
the  articles  of  food  which  are  in  common  use  by  the 
people  at  large."  There  is  still  more  evidence  which 
need  not  here  be  given  to  show  that  the  purchasing 
power  of  the  rupee  in  India  has  declined.  This  may 
be  taken  as  conclusive,  now  that  the  recent  tables  of 
prices  by  Mr.  O'Conor  have  been  published.3 

1  Cited  by  Ellstaetter,  Indiens  Silberwahrung,  p.  36. 

2  Minutes  of  Evidence,  Indian  Currency  Commission,  p.  161. 

*  In  Atkinson's  index  numbers  for  India,  there  was  a  rise  from  100  in 
1886  to  125  in  1893,  and  to  174  in  1918.  See  W.  C.  Mitchell,  Bulletin  of 
Bureau  of  Labor,  No.  173,  p.  282. 


LABORING  CLASSES  AND   SILVER         219 

In  Santo  Domingo,  the  sugar,  coffee,  tobacco,  and 
cacao — the  main  exports — like  wheat  and  rice  in  India, 
have  their  prices  fixed  in  the  European  and  American 
markets  to  which  they  are  shipped,  and  do  not  depend 
on  silver  quotations.  So  long  as  their  cost  of  produc- 
tion at  home  was  paid  for  in  the  same  number  of  Mexi- 
can dollars — which  was  long  the  case — they  could  ex- 
port with  increasing  facility  as  silver  depreciated. 
But  in  regard  to  commodities  in  general,  in  Santo 
Domingo  as  in  India,  the  fall  in  the  value  of  silver  re- 
sulted in  a  compensating  rise  of  prices  and  a  diminu- 
tion in  the  purchasing  power  of  the  Mexican  dollar,  as 
well  as  of  the  rupee. 

§  7.  The  laborers  were  the  class  who  in  the  end 
suffered  most.  Santo  Domingo,  with  its  slowness  in 
adapting  itself  to  changed  conditions,  was  precisely  the 
country  ^in  which  wages  would  lag  behind  the  move- 
ment of  prices.  As  in  our  Civil  War,  when  the  "green- 
backs" depreciated  and  prices  rose,  wages  did  not 
immediately  follow.  It  is  the  old  fact,  in  a  new  form 
— that  receivers  of  wages  suffer  from  a  depreciating  cur- 
rency. Wages  are  slow  to  rise  and  quick  to  fall;  and 
in  Santo  Domingo  there  was  another  illustration  of 
the  truth  of  this  familiar  proposition. 

The  laborer  was  ignorant,  unfamiliar  with  monetary 
operations,  and  the  recipient  of  wages  customarily 
fixed  at  60  or  75  cents  in  Mexican  coin,  and,  rarely, 
at  a  dollar.     In  1888  in  Azua  wages  were  50  cents  a 


220  MONEY  AND  PRICES 

day  in  Mexican  silver;  and  there  is  ground  for  believ- 
ing that  wages  have  risen  since  then.  But  with  a 
fixed  rate  of  wages  their  purchasing  power  had  dimin- 
ished as  prices  rose.  The  laborers  are  most  numerous 
on  the  southern  side  among  the  sugar-plantations 
and  in  Santo  Domingo  City.  They  are  not  efficient, 
nor  careful,  nor  steady.  But  nothing  amazed  me  more 
than  the  nearly  universal  belief  of  the  laborers  every- 
where that  silver  was  unsteady  and  undesirable  as  a 
means  of  payment.  They  had  found  out  by  experi- 
ence that  their  silver  wages  were  losing  in  purchasing 
power.  The  great  democratic  feeling  of  equality  may 
account  for  this — since  what  was  known  to  one  was 
passed  on  to  every  one  else.  The  laboring  classes  were 
a  unit  in  wishing  a  gold  medium  of  payments. 

The  reason  for  this  was  not  far  to  seek.  How  was 
the  laborer,  now  receiving  the  customary  60  or  75 
cents,  to  be  affected  by  a  change  to  a  gold  standard? 
The  question  evidently  was,  how  much  of  the  new 
medium  would  he  receive?  The  gold  medium  would 
buy  twice  as  much  as  the  one  of  silver.  It  would  be 
difficult  to  persuade  the  laborer  to  take  any  less  num- 
ber of  cents  in  gold  than  he  formerly  received  in  silver. 
It  is  evident  that  the  laborer  starts  out  with  the  initial 
advantage  in  any  change  to  a  better  standard.  The 
presumption  is  that  he  will  ask  for  the  same  number 
of  cents  for  his  daily  wages;  and  even  though  30  or 
40  cents  in  gold  might  buy  as  much  as  the  old  wages 
it  was  hardly  likely  that  the  daily  stipend  could  be 


DISTRIBUTING  MERCHANTS  221 

reduced  from  60  or  75  cents  to  that  low  rate.  Labor 
is  not  easy  to  obtain;  hence  working  men  can  demand 
and  secure  a  very  considerable  advance  in  wages. 
That  the  general  mass  of  people  fully  understood  this 
principle  cannot  be  said,  but  it  was  very  certain  that 
they  earnestly  favored  the  gold  standard.  The  very 
same  reasons  also  were  clearly  those  which  underlay 
the  opposition  of  the  sugar-planters  and  large  em- 
ployers of  labor  to  the  proposed  reform. 

The  class  who  actually  suffered  heavily,  but  were  in 
a  position  to  protect  themselves,  were  the  merchants, 
or  dealers  in  imported  goods  of  general  consumption. 
Merchants,  for  example,  importing  cotton  goods  from 
gold-using  countries  on  credit,  were  under  obligations 
to  pay  in  gold  on  settling  accounts  at  the  end  of  the 
period  of  credit.  In  Santo  Domingo  the  importers 
sell  to  small  dealers  who  distribute  goods  directly  to 
consumers.  These  small  dealers  sell  on  credit,  often 
for  as  long  as  nine  months,  and  they  pay  the  import- 
ers in  silver.  Clearly,  when  silver  was  paid  in  nine 
months  after  purchase  of  goods,  the  loss  from  the  less- 
ened value  of  silver  fell  upon  the  merchants  who  were 
obliged  to  settle  accounts  in  gold.  Many  articles  are 
imported,  and  as  the  class  of  those  engaged  in  distrib- 
uting goods  is  very  large,  compared  with  producers,  the 
distress  was  wide-spread;  and  in  the  minds  of  all  it 
was  clearly  associated  with  its  real  cause,  the  fall  of 
silver.  The  goods  did  not  change  in  prices  relatively 
to  gold;  silver  changed  relatively  to  the  goods  as  well 
as  to  gold,  as  every  one  knew. 


222  MONEY  AND  PRICES 

§  8.  From  the  preceding  exposition  of  the  condi- 
tions existing  in  Santo  Domingo  affecting  the  mone- 
tary and  financial  situation  it  may  be  better  seen  what 
the  legislator  had  to  deal  with.  There  were,  of  course, 
many  difficulties  to  be  overcome  and  many  pitfalls 
to  avoid.  In  regard  to  the  fluctuation  of  exchanges, 
as  was  fully  explained,  there  was  no  vital  or  insur- 
mountable obstacle  to  trade;  but  steadiness  in  the 
exchanges  would  give  confidence  and  ease  to  business. 
Changing  prices  due  to  a  fluctuating  standard  were  a 
real  evil,  to  be  prevented  by  all  possible  means.  The 
revenues  must  be  maintained,  and  laborers  protected 
from  rising  prices.  The  forces  then  to  be  counted  on 
for  reform  were:  the  government  and  financial  inter- 
ests; the  laboring  classes;  and  the  traders  who  dis- 
tributed to  consumers.  On  the  other  side  would 
probably  be  found  those  dealers  in  bills  who  profited 
by  the  high  rates  of  exchange  due  to  fluctuations; 
those  affected  by  higher  rates  of  duties;  and  the  sugar- 
planters.  Thus  the  government  and  the  great  mass  of 
the  people  were  urgent  for  reform  as  against  a  lesser 
number  of  bankers  and  larger  producers. 

It  is  evident  that  a  monetary  scheme  was  inevitably 
bound  up  with  large  financial  and  fiscal  questions  and 
with  the  general  business  of  the  country.  The  new 
system  had  to  be  carefully  adapted  to  existing  mone- 
tary habits.  The  Mexican  dollar  had  long  been  the 
money  of  account,  and  had  to  be  reckoned  with.  The 
failure  of  the  recent  franc  system  of  coinage  to  meet 


NEW  LEGISLATION  22 


6 


the  situation  was  ominous  for  any  too  great  departure 
from  monetary  habits.  In  a  country  in  which  the 
greater  number  of  transactions  were  in  small  sums, 
it  was  necessary  that  silver  should  be  provided  for 
general  use;  and  yet  it  was  imperative  that  this  silver 
should  be  maintained  at  par  with  the  gold  currencies 
of  countries  with  which  they  traded.  The  new  scheme, 
in  short,  must  meet  the  following  demands  in  order 
to  secure  enactment:  It  must  furnish  a  stable  par  of 
exchange;  it  must  not  violate  the  monetary  habits 
of  the  people;  it  must  provide  silver  as  the  money  in 
general  use;  it  must  protect  the  silver  money  from  all 
fluctuations  of  the  metal;  and  yet  it  must,  in  addition, 
provide  a  profit  for  the  government. 

To  meet  these  requirements  the  scheme  was  drawn 
up  as  embodied  in  the  law,1  which  was  actually  passed, 
April  28,  1894.  The  provisions  of  the  law  explain 
themselves;  but  it  may  be  well  to  call  attention  to  a 
few  principal  features  in  it. 

(1)  The  monetary  unit  adopted  agreed  with  the 
prepossessions  of  the  people.  The  peso,  or  dollar, 
being  their  customary  coin,  there  was  a  natural  desire 
to  obtain,  so  far  as  possible,  uniformity  with  the  coin- 
age system  of  the  United  States,  with  which  the  largest 
trade  was  carried  on.  There  being  the  friendliest  con- 
fidence in  the  United  States,  the  proposal  to  adopt 
coins  of  the  same  weight  and  size  as  ours  met  with 
general  approval.     This  was  carried  out  so  far  as  re- 

1  See  Appendix  I. 


224  MONEY  AND  PRICES 

gards  the  gold  coins;  and  the  legal  and  monetary  unit 
of  the  Dominican  Republic,  was  declared  to  be  the 
gold  dollar  of  23.22  grains  pure  gold.1  But  only 
twenty-dollar,  ten-dollar,  and  five-dollar  gold  pieces 
were  to  be  coined. 

The  field  of  circulation  for  all  denominations  below 
five  dollars  was  left  free  for  the  silver  coins.  A  neces- 
sity for  the  existence  of  a  subsidiary  circulation  of 
silver  was  created.  This  implied  not  only  the  wish  to 
keep  in  use  the  largest  possible  amount  of  silver  able  to 
circulate  in  retail  and  general  transactions  among  the 
people,  but  the  certainty  of  a  greater  gain  to  the 
government.  In  the  vacuum  thus  created  the  one- 
dollar  silver  piece  was  to  play  the  principal  role,  yet 
only  as  a  token  coin.  For  many  reasons  of  local  policy 
it  was  decided  to  make  the  new  Dominican  silver  dollar 
heavier  than  any  current  silver  dollar  by  fixing  the 
amount  of  pure  silver  in  it  at  380  grains.  In  its  silver 
content2  it  was  to  be  worth  more  than  any  of  its  brother 
dollars.  As  regards  smaller  coins,  inasmuch  as  the 
silver  dollar  piece  was  a  token  coin,  there  was  no  reason 
for  making  any  distinction  between  the  proportional 
weights  of  it  and  those  of  the  subsidiary  coins;3  so 

1  See  Law,  chap.  I,  art.  3. 

1  United  States  Dollar 371 .  25  grains 

Japanese  Yen 374-4      " 

Mexican  Dollar 377-4      " 

Old  United  States  Trade  Dollar 378. 

New  Dominican  Dollar 380. 

'The  United  States  silver  dollar  contains  371.25  grains  of  pure  silver; 
but  two  halves,  or  four  quarters,  contain  only  345.6  grains  of  pure  silver. 
This  difference  was  made  in  1853  in  order  to  put  subsidiary  silver  so  far 
beneath  the  ups  and  downs  of  the  gold  and  silver  dollars  that  the  changes 


SUBSIDIARY  SILVER  225 

that  halves,  quarters,  and  dimes  were  made  propor- 
tional parts  of  380  grains. 

(2)  First  and  foremost,  however,  was  the  provision 
to  keep  the  silver  currency  at  par  in  gold  by  a  system 
of  redemption.1  It  will  be  noted  that  380  grains  was 
chosen  as  the  silver  dollar  for  local  reasons,  and  that 
23.22  grains  was  adopted  as  the  gold  dollar  for  com- 
mercial reasons;  there  was  no  attempt  whatever  made 
to  determine  first  upon  what  ratio  between  gold  and 
silver  it  would  be  safe  to  base  a  coinage.  Hamilton 
tried  that  method  and  failed.  Under  a  system  of  re- 
demption all  the  silver  needed  for  circulation  could  be 
maintained  in  use,  and  the  difficulties  as  to  the  ratio 
would  vanish.  This  is  the  characteristic  part  of  the 
scheme.  The  past  history  of  paper  money  was  drawn 
upon  for  the  means  to  secure  the  circulation  of  silver 
at  par  with  gold.  The  Dominican  silver  dollar  was 
heavier  than  any  other;  but  its  market  value  was  then 
about  one-half  of  the  23.22  grains  of  gold  in  the  gold 
dollar.  In  general,  the  value  of  a  promise  to  pay  de- 
pends upon  the  keeping  of  the  promise.  Convertible 
paper  is  always  at  par.     Why  not  have  convertible  sil- 


which  had  alternately  driven  either  gold  or  silver  coins  out  of  circulation 
would  not  touch  the  subsidiary  coins.  The  Act  of  1853  was,  therefore, 
practically  an  act  to  establish  a  subsidiary  silver  coinage;  and  it  left  the 
old  silver  dollar,  long  out  of  use,  to  take  care  of  itself.  At  the  present  day 
the  conditions  of  1853  are  obsolete;  there  is  no  reason  for  their  existence. 
Under  a  system  of  redemption  it  makes  no  difference,  so  far  as  concerns 
circulation  at  par,  whether  the  subsidiary  coins  correspond  with  the  dollar 
piece  or  not.  The  amount  of  silver  in  them  is  then  important  only  as  it 
affects  the  suppression  of  counterfeiting. 
1  See  Law,  chap.  Ill,  arts.  14-ig. 


226  MONEY  AND  PRICES 

ver?  A  paper  money  with  an  inalienable  50  per  cent, 
collateral  would,  on  liquidation,  be  worth  fifty  cents  on 
the  dollar;  but  there  is  no  difference,  except  in  degree, 
between  keeping  at  par  this  kind  of  paper  and  a  kind 
which  has  no  collateral  but  the  promise.  In  either  case 
a  reserve  sufficient  to  redeem  any  note  on  demand 
serves  the  purpose.  This  also  fits  the  case  of  silver 
with  a  market  value  of  only  fifty  cents  on  the  dollar. 
It  can  be  kept  at  par  with  gold  only  by  insuring  its 
convertibility  into  gold.  It  follows  from  this  that 
the  actual  number  of  grains  in  a  dollar  was  unim- 
portant. 

This  method  of  dealing  with  silver,  moreover,  has 
the  merit  of  demanding  of  a  country  only  that  which 
is  within  its  power.  It  cannot  redeem  all  the  world's 
silver;  but  each  country  does  its  own  £>art  in  redeem- 
ing all  coins  bearing  its  own  imprint  that  can  stay  in 
circulation  within  its  limits.  And  that  is  all  that 
monetary  science  asks  of  any  system.  Free  coinage 
of  silver  would  here  be  an  absurdity.  It  would  be 
somewhat  like  the  printing  of  unlimited  paper;  it 
would  destroy  the  convertibility  by  which  its  value 
was  maintained.  We  do  not  recognize  that  legislation 
has  any  duty  whatever  "to  keep  up  the  value  of  silver" 
or  of  any  other  commodity;  but  even  from  this  point 
of  view  a  country  which  by  redemption  maintains  all 
the  silver  it  can  use  at  twice  its  value  is  doing  more 
real  service  to  the  value  of  silver  than  it  could  by  any 
agreements  upon  ratios.     Consequently,  the  Domini- 


PROFIT  TO  GOVERNMENT  227 

can  law  restricted  the  amount  of  silver  in  circulation  to 
sums  decreed  by  the  government.1  We  have  here, 
then,  the  two  necessary  conditions  for  a  stable  conver- 
tible currency:  (1)  redemption  and  (2)  limitation  of 
quantity. 

The  action  of  India,  June  26,  1893,  in  closing  its 
mints  to  the  free  coinage  of  silver  was  a  necessary 
measure;  but  it  was  only  a  half  step.  The  aim  in 
India  was  to  maintain  its  own  silver  coins — not  all 
silver— at  a  stable  par  in  gold.  It  took  then  the  first 
step  toward  limiting  its  quantity.  The  next  step  was 
inevitable — it  must  eventually  adopt  a  system  of  re- 
demption of  its  own  rupees.  In  no  other  way  has  a 
depreciated  currency  ever  been  maintained  at  par. 
In  the  Santo  Domingo  scheme  this  was  frankly  recog- 
nized; and  it  is  interesting  to  note  that  two  members 
of  the  Indian  Currency  Committee  {Report,  p.  42), 
Messrs.  T.  H.  Farrer  and  R.  E.  Welby,  strongly  recom- 
mended this  measure  for  India.  India  in  the  end  had 
to  come  to  this. 

The  quantity  in  circulation,  it  was  hoped,  would  be 
determined  automatically.  On  the  one  hand,  by  giv- 
ing to  the  Dominican  government  the  sole  right  to  coin 
silver,  there  existed  the  inducement  to  coin  as  much  as 
possible,  because  of  the  very  large  profit  of  about  50 
per  cent,  in  the  seigniorage.  But,  on  the  other  hand, 
this  means  of  profit  would  disappear  unless  the  system 
of  redemption  were  maintained  intact.     An  excessive 

1  Sec  Law,  chap.  Ill,  art.  13. 


228  MONEY  AND  PRICES 

issue  of  silver  would  come  back  on  the  redeeming  offices, 
and  no  excess  beyond  the  needs  of  the  circulation 
could  stay  out.    There  was  thus  a  sure  check  on  ex- 
cessive issues  of  silver;  the  self-interest  of  the  govern- 
ment was  enlisted  to  maintain  redemption,  since  only 
by  maintaining  redemption  could  any  profits  be  reaped. 
The  supply  of  coins  was  provided  by  direct  outlay  of 
the  government;  but  the  gain  of  the  government  from 
the  seigniorage  was  such  as  to  stimulate  it  to  put  out 
all  that  would  circulate.     The  more  put  in  circulation, 
the  more  profit  from  seigniorage  to  the  government; 
and  the  government  would  not  be  slow  to  use  this  op- 
portunity.   Every  dollar  of  silver,  costing  to  coin  at 
the  then  price  of  silver  about  fifty  cents,  was  issued  by 
the  government  at  its  face  value  for  one  hundred  cents 
in  gold.    This  profit  of  one-half  on  the  whole  of  its 
silver  coinage,  however,  was  dependent  entirely  on  the 
maintenance  of  redemption  in  gold.     If  silver  coins 
were  not  kept  at  par  in  gold  then  their  value  fell,  and 
the  profit  on  seigniorage  pro  tanto  vanished.    This 
explains  why  it  was  for  the  interest  of  the  government 
to   keep   the   redemption   system   intact.     On   every 
million  dollars  of  silver  coins  issued  it  gained  a  profit 
of  half  a  million  dollars.    The  only  deduction  from  this 
gain  was  the  interest  on  the  reserve  fund  of  gold  re- 
quired to  be  kept  on  hand  for  redemption  purposes; 
but  this  reserve  need  never  be  large,  unless  there  was 
an  attempt  to  issue  silver  beyond  the  amounts  needed 
for  circulation.     In  general,  beyond  the  early  tests 


GOLD  EXCHANGE  ALLOWED  229 

made  solely  to  establish  a  common  belief  in  redemp- 
tion, the  probable  demands  would  be  somewhat  in 
proportion  to  the  savings  of  the  community;  for  sav- 
ings would  usually  be  converted  into  gold  before  being 
buried  or  hidden.  And,  of  course,  if  imports  for  a 
time  much  exceeded  exports,  gold  would  move  outward. 
But  exports  usually  exceed  imports.1  With  an  in- 
creased production,  however,  and  a  consequently 
greater  purchasing  power  of  the  country,  gold  would 
have  an  increased  tendency  to  move  toward  Santo 
Domingo.  Prosperity  would  support  the  system. 
The  building  of  railways  and  all  improvements  would 
work  to  this  same  end. 

A  precautionary  measure2  against  possible  hostility 
to  the  system  provided  that  gold  exchange  on  New 
York  might  in  an  emergency  be  used  in  redemption. 
The  occasion  might  arise  when  an  enemy  would  pre- 
sent an  enormous  amount  of  silver  at  once  at  a  branch 
office  in  order  to  discredit  the  system.  A  resort  to 
gold  exchange,  however,  would  be  a  most  infrequent 
occurrence.  It  was  allowed  only  because  the  island 
was  not  in  immediate  connection  with  the  continent 
and  the  reservoirs  of  gold. 

1  The  statistics  of  exports  and  imports  are  not  very  trustworthy,  but  the 
figures  for  1891  and  1892  are  approximately  correct: 


Year 


1891. 
1892. 


Exports 


$2,926,039 
3,035,660 


Imports 


$2,687,558 
2,011,735 


1  Law,  chap.  Ill,  art.  16. 


230  MONEY  AND  PRICES 

(3)  When  it  is  remembered,  also,  that  persistence  of 
monetary  habits1  is  very  determined,  account  must  be 
taken  of  the  Mexican  dollar.  It  was,  of  course,  the 
interest  of  the  government  to  discredit  all  foreign  sil- 
ver coins;  for  to  the  extent  that  they  circulated  they 
kept  out  Dominican  silver  coins  and  thereby  diminished 
the  profit  of  the  government.  Working  to  the  same 
purpose  were  the  well  developed  associations  of  loss 
and  injury  connected  with  the  Mexican  dollar  during 
the  fall  in  the  value  of  silver,  and  which  were  wide- 
spread. Without  relying  on  this  favorable  sentiment, 
however,  the  plan  provided  its  own  means2  of  driving 
the  Mexican  dollar  out  of  circulation.  By  refusing  to 
receive  it  in  any  payments  except  at  a  rate  which 
made  the  Mexican  dollar  worth  more  for  exportation 
elsewhere,  it  would  result  that  as  the  new  silver  came 
in,  the  old  would  go  out. 

(4)  Gold  and  silver  coins  were  made  an  unlimited 
legal  tender;  since  silver  coins  were  convertible  into 
gold.  Existing  indebtedness  could  meanwhile,  until 
the  new  coinage  was  prepared,  be  settled  in  Mexican 
dollars  at  their  market  value  in  gold.  All  debts  con- 
tracted before  the  first  day  of  June,  1894,  were  to  be 
paid  in  the  money  in  which  they  were  contracted. 
After  that  date,  while  contracts  could  be  made  in  any 
money,  in  default  of  an  express  stipulation  of  course 

1  In  the  United  States,  for  example,  many  people  still  reckon  prices  in 
"shillings"  and  the  like  denominations,  some  of  which  have  not  existed  as 
coins  for  over  a  hundred  years. 

2  Chap.  Ill,  art.  13. 


NEW  COINAGE  231 

the  national  gold  or  silver  coins  would  be  the  proper 
legal  tender. 

Other  considerations  entered  into  the  law  which 
were  of  no  importance  to  the  general  scheme.  There 
had  been,  for  instance,  a  concession  previously  granted 
to  a  French  company  by  which  the  Banco  Nacional  de 
Santo  Domingo  was  established  in  the  island;  and  this 
institution  had  been  granted  the  right  to  coin  all  na- 
tional money.  When,  however,  recent  conditions  de- 
manded a  new  coinage  system,  and  the  present  scheme 
was  decided  upon,  the  Banco  Nacional  was,  by  virtue 
of  its  concession,  given  the  choice  of  accepting  or  re- 
jecting the  functions  created  in  the  law  for  a  Fiscal 
Agency  which  should  see  not  only  to  the  coinage  but 
also  to  the  redemption  of  the  money.  The  provisions1 
regarding  the  Banco  Nacional  were  introduced  merely 
to  provide  for  carrying  out  the  system  in  case  this  in- 
stitution was  unwilling  to  undertake  the  task. 

(5)  It  might  be  asked,  finally,  how  were  the  means 
to  be  found  to  provide  the  new  coinage?  The  first 
burden  would  fall,  of  course,  on  the  revenues;  but,  as 
must  have  been  seen,  the  sums  taken  from  the  revenues 
to  pay  for  the  coinage  would  be  only  in  the  nature  of 
an  advance.  Since  the  new  coinage  system  provided 
a  profit  to  the  government,  it  could  not  be  in  any 
sense  a  burden  upon  the  revenues.  Not  only  did  the 
country  get  relief  from  what  was  crushing  trade,  not 
only  was  exchange  prevented  from  fluctuation,  not 

1  Law,  chap.  Ill,  arts.  14-19- 


232  MONEY  AND  PRICES 

only  was  the  credit  of  the  country  and  the  value  of  its 
bonds  increased,  but  the  government  gained  a  large 
profit  on  the  seigniorage,  while  the  country  was  enabled 
to  go  on  quietly  using  silver  in  its  retail  transactions. 
The  scheme  was  simple  and  compact.  Its  merits, 
whatever  they  are,  arose  from  following  correct  mone- 
tary principles. 


CHAPTER  IX 

THE  REFUNDING  BILL  OF   1881 » 

§  i.  The  lack  of  sound  financial  judgment  in  Con- 
gress has  been  so  unfortunately  familiar  as  scarcely  to 
excite  surprise.  The  method  of  selling  our  bonds 
during  the  Civil  War,  the  needless  passage  of  the  Legal- 
Tender  Act,  the  fatuous  refusal  to  permit  contraction 
of  the  currency,  and  the  insane  enactments  of  the 
Bland  silver  bill  are  mortifying  chapters  in  our  finan- 
cial history.  And  while  modern  credit  and  banking 
is  at  once  a  most  intricate  and  sensitive  thing,  yet  in 
nothing  else  has  Congress  more  boldly  interfered. 

In  primitive  times,  goods  were  exchanged  directly 
for  each  other.  A  hungry  warrior  bartered  a  coat  of 
mail  for  fat  oxen.  Civilization  has  gone  on,  and  among 
its  many  marvels  none  is  less  interesting  than  the  sys- 
tem of  banking  expedients,  by  which  we  are  returning 
to  a  new  but  skilfully  adjusted  method  of  barter.  It 
is  a  system  grown  up  from  the  slow  experience  of  cen- 
turies and  cleverly  adapted  to  the  needs  of  trade — a 
natural  outgrowth  of  the  increased  exchange  of  goods. 
It  is  the  heart  of  the  industrial  body.  Without  it, 
business,  in  anything  like  its  present  magnitude,  could 

1  House  of  Representatives  Bill,  No.  4592,  Forty-Sixth  Congress,  Third 
Session. 

233 


234  MONEY  AND  PRICES 

not  exist.  And  on  this  sensitive  mechanism  Congress 
has  often  laid  its  rude  hand  with  a  strange  mixture  of 
confidence  and  blundering  ignorance. 

Banks  are  not  merely  lenders  of  capital,  but  are  the 
agencies  through  which  the  titles  to  goods  pass,  so  that 
one  article  can  be  offset  against  another.  Like  divi- 
sion of  labor,  international  trade,  and  great  railways, 
banks  are  a  means  of  abridging  human  labor.  While 
ponderous  trains  thunder  into  our  Eastern  cities  from 
the  Western  grain-fields,  and  others,  in  return,  roll  west- 
ward across  the  country  filled  with  silks  and  cottons, 
the  titles  to  these  goods  (and  the  means  by  which  all 
are  exchanged  one  for  the  other)  are  being  carried  to 
and  fro  in  the  shape  of  bills  and  drafts  by  the  banks, 
the  great  railways  of  credit.  For  every  transaction, 
every  line  of  steamers,  every  network  of  railways,  there 
is  a  corresponding  credit  service,  tallying  with  each 
exchange  of  goods — as  it  were,  in  the  air  overhead  and 
unseen,  but  really  running  on  its  quick  despatch 
through  the  mails,  the  telegraph,  and  the  telephone, 
and  officered  by  the  bankers  of  the  country.  It  is  as 
distinct,  separate,  and  legitimate  an  employment  as  is 
that  of  a  common  expressman.  Modern  banking  and 
the  business  of  the  country  go  together,  like  the  two 
blades  of  the  scissors.  Take  one  away,  and  you  de- 
stroy both. 

§  2.  While  the  national  banking  system  was  the  best 
the  country  had  enjoyed,  it  had  existed  only  since  1864. 


SPECIAL  RESERVES  235 

Before  that  time  the  old  state  banks  were  regulated 
by  each  State  according  to  varying  standards  of  hon- 
esty, with  the  marked  exception  of  the  system  in  New 
York,  established  in  1838,  and  memorable  as  the  model 
for  the  regulation  of  our  national  banks.  By  the  New 
York  law  a  bank  was  not  granted  the  power  to  issue 
notes  unless  a  deposit  of  state  or  United  States  bonds 
with  the  state  comptroller  was  made,  sufficient  to  se- 
cure the  ultimate  redemption  of  the  notes.  This  plan 
of  a  special  reserve  for  circulation  is  similar  to  the  basis 
of  the  English  Act  of  1844,  and  implies  a  very  different 
policy  from  that  which  keeps  no  special  reserve  for 
any  one  liability  more  than  another.  A  bank  is  like 
a  man  in  debt,  who  owns  bonds,  coin,  and  securities, 
to  exactly  the  amount  of  his  debts.  He  has  debts 
(called  liabilities),  and  he  has  an  equal  amount  of 
wealth  (called  resources)  with  which  to  pay.  The 
Bank  of  England  before  1844,  the  old  United  States 
Bank,  and  the  larger  number  of  state  banks  set  aside 
no  special  fund  for  the  redemption  of  their  note  cir- 
culation. One  might  liken  the  resources  of  a  bank 
under  that  which  is  now  the  old  system  to  the  crew  of 
a  ship,  all  suddenly  called  upon  to  take  to  their  guns; 
without  a  man  at  the  sails,  a  change  of  wind  would 
be  disastrous,  and  the  ship  would  be  wrecked.  This, 
in  effect,  was  what  nearly  happened  to  the  Bank  of 
England  in  1825. 

The  National  Bank  Act  contained  the  special- reserve 
plan,  and  gave  absolute  security  to  the  note-holder. 


236  MONEY  AND  PRICES 

No  man  ever  lost  one  cent  by  having  in  his  hands  a 
note  of  an  insolvent  national  bank.  But  in  this  system 
of  circulation  Congress  proposed  to  introduce  very 
astonishing  changes  by  the  refunding  bill  of  February, 
1 88 1,  the  history  of  which  is  worth  preserving  as  a 
valuable  means  of  teaching — on  the  principle  that  a 
sign-board  often  warns  us  where  not  to  go.  The  pro- 
vision by  which  a  separate  fund  was  set  apart  is  simple. 
The  banks  were  required  to  deposit  with  the  United 
States  treasurer  in  Washington  to  secure  their  circula- 
tion United  States  bonds  of  any  kind,  and  were  per- 
mitted (there  was  no  compulsion  about  it)  to  issue 
notes  to  the  amount  of  only  90  per  cent,  of  the  par 
value  of  these  bonds.  (Revised  Stat,  sec.  51 71.)  The 
requirement  as  to  the  increase  or  reduction  of  this 
deposit  formed  section  16  of  the  Act  of  June,  1864,  and 
section  5160  of  the  Revised  Statutes: 

"The  deposit  of  bonds  made  by  each  association 
shall  be  increased  as  its  capital  may  be  made  up  or 
increased,  so  that  every  association  shall  at  all  times 
have  on  deposit  with  the  treasurer  registered  United 
States  bonds,  to  the  amount  of  at  least  one-third  of  its 
capital  stock  actually  paid  in.  And  any  association 
that  may  desire  to  reduce  its  capital,  or  to  close  up  its 
business  and  dissolve  its  organization,  may  take  up  its 
bonds  upon  returning  to  the  comptroller  its  circulating 
notes  in  the  proportion  hereinafter  required,  or  may 
take  up  any  excess  of  bonds  beyond  one-third  of  its 
capital  stock,  and  upon  which  no  circulating  notes  have 
been  delivered." 


WITHDRAWING  NOTES  237 

The  important  words  for  the  present  explanation 
are  "Us  circulating  notes,"  meaning  the  notes  of  the 
given  national  bank.  Should  a  bank  see  fit,  in  a  time 
of  depression,  to  reduce  its  circulation,  it  would  be 
able,  under  this  section,  to  do  so  only  by  presenting 
its  own  circulating  notes,  and  receiving  therefor  its 
deposit  of  bonds.  In  actual  practice,  however,  a  bank 
holds  but  very  few  of  its  own  notes,  and  could  get 
them  only  at  the  places  of  redemption.  National 
bank  notes,  being  equally  good  with  greenbacks,  are 
never,  in  fact,  presented  by  the  public  to  any  amount 
for  redemption  at  the  counter  of  a  bank.  Moreover, 
an  institution  is  required  to  receive  the  notes  of  any 
other  national  bank,  and  has  no  object  in  presenting 
the  notes  for  lawful  money  except  in  cases  of  insol- 
vency or  retirement.  The  outstanding  notes  of  a 
given  bank  are  in  circulation  (by  virtue  of  the  sound 
character  of  all  the  national  bank  circulation)  not 
merely  in  the  locality  where  the  bank  is  known,  but  in 
the  hands  of  merchants,  banks,  and  farmers  in  almost 
every  part  of  the  country.  What  is  important  to  ob- 
serve is  that  the  process  of  drawing  in  notes  by  a  bank 
is  a  very  slow  one,  and  a  slow  one  just  in  proportion 
as  the  national  bank  note  is  a  safe  money  anywhere  in 
the  Union.  For  the  holder,  finding  it  perfectly  good 
and  safe,  has  no  object  in  presenting  it  in  exchange  for 
other  kinds  of  money,  even  though  the  bank  may  have 
an  object  in  getting  it  redeemed.  A  given  bank,  con- 
sequently, could  not  reduce  its  circulation  and  recover 


238  MONEY  AND  PRICES 

its  deposit  of  bonds  except  by  presenting  its  own 
notes,  and  it  could  never  get  possession  of  such  as  had 
left  its  hands  until  after  long  use  had  so  worn  or  muti- 
lated them  that  they  would  be  sent  in  to  the  redemp- 
tion agency  at  Washington.  The  weak  spot,  then,  of 
the  Act  of  1864,  appeared  in  the  practical  impossibility 
of  reducing  circulation  at  the  will  of  the  bank. 

This  difficulty  was  removed  by  the  Act  of  June  20, 
1874,  which  repealed  sections  5159  and  5160  of  the 
former  act: 

"That  any  association  organized  under  this  act  or 
any  of  the  acts  of  which  this  is  an  amendment,  desiring 
to  witltdraw  its  circulating  notes,  in  whole  or  in  part, 
may,  upon  the  deposit  of  lawful  money  with  the  treasurer 
of  the  United  States,  in  sums  of  not  less  than  nine  thou- 
sand dollars,  take  up  the  bonds  which  said  association 
has  on  deposit  with  the  treasurer  for  the  security  of 
such  circulating  notes;  which  bonds  shall  be  assigned 
to  the  bank  in  the  manner  specified  in  the  nineteenth 
section  of  the  national-bank  act;  and  the  outstanding 
notes  of  said  association,  to  an  amount  equal  to  the 
legal-tender  notes  deposited,  shall  be  redeemed  at 
the  treasury  of  the  United  States,  and  destroyed  as 
now  provided  by  law:  Provided,  That  the  amount  of 
the  bonds  on  deposit  for  circulation  shall  not  be  reduced 
below  fifty  thousand  dollars." 

It  will  be  seen  at  once  that  by  this  change  a  given 
bank  could  withdraw  the  bonds  behind  its  circulation 
instantly  and  rapidly  by  presenting,  no  longer  its  own 
circulating  notes,  but  merely  lawful  money;    that  is, 


WITHDRAWING  OF  LAWFUL  MONEY      239 

greenbacks  or  coin.  The  importance  of  the  section, 
of  course,  is  found  in  the  words  "lawful  money";  for 
this  was  a  kind  of  money  which  any  bank  could  com- 
mand at  once,  and  in  large  sums.  An  institution  could 
thus  send  to  Washington  lawful  money  to  the  amount 
of  its  bonds,  withdraw  the  deposited  bonds,  and  leave 
a  complete  security  to  the  note-holder  in  the  shape  of 
greenbacks  or  coin  in  the  treasury  at  Washington,  to 
await  the  slow  incoming  of  the  notes  for  redemption. 
The  effect  of  the  change  was  simply  in  the  direction  of 
greater  ease  and  rapidity  in  reducing  circulation. 

This  was  the  position  of  the  banks  in  regard  to  their 
circulation  when  the  abortive  refunding  bill  of  1881 
came  before  Congress.  But  to  understand  clearly  the 
results,  it  will  be  necessary  to  give  a  short  explanation 
of  the  generally  misunderstood  amount  of  profit 
derived  by  the  banks  solely  from  their  note  issues. 
The  method  of  comparing  the  amount  invested  in 
bonds  with  the  same  amount  loaned  directly  to  the 
public  does  not  give  the  full  case  against  the  profits  on 
circulation.  If  the  alternative  to  investing  in  bonds 
were  the  placing  of  a  like  sum  in  bank  reserves,  that 
reserve  would  carry  liabilities  (resulting  from  loans) 
of  three  or  four  times  its  amount,  and  the  profit  from 
not  investing  in  bonds  would  be  that  on  loans  yielding 
several  times  as  much  as  the  sum  put  into  bonds, 
leaving  no  gain  at  all  on  circulation,  but  rather  a  heavy 
loss.  The  comptrollers,  however,  have  used  a  simple 
arithmetical  method  arrived  at  by  answering  the  ques- 


24o  MONEY  AND  PRICES 

tion :  What  profit  would  the  banks  lose  by  withdrawing 
their  whole  circulation  ?  As  the  lowest  rate  of  interest 
paid  by  the  government  at  that  time  was  4  per  cent., 
I  shall  present  a  computation  of  Comptroller  Knox, 
based  on  a  deposit  of  4  per  cent,  bonds: 

Interest  on  $100,000  U.  S.  4  per  cent,  bonds $4,000 

Circulation  issued  on  above $90,000 

Deduct  premium  on  bonds  $1 2,000 
Deduct    reserve    (5    per 

cent.) 4,500 

16,500 


Leaving  loanable  circulation $73,500,  6  per  cent,  interest  on 

which  is 4,410 


Total  income  on  circulation $8,410 

Deduct  1  per  cent,  tax  on  circulation $900 

Deduct  cost  of  redemptions 81 

981 


Leaving  as  net  receipts $7,429 

$100,000  capital  loaned  directly  at  6  per  cent 6,000 


Difference  in  favor  of  circulation $1,429 

When  it  is  remembered  that  the  functions  of  deposit 
and  discount  in  banking  could  be  carried  on  without 
the  consent  of  the  treasury,  and  that  the  profits  on 
circulation  were  practically  the  only  reason  why  a 
bank  remained  in  the  system,  or  in  fact  why  the  na- 
tional bank  currency  existed  at  all,  the  inducement 
did  not  seem  very  large.  But  what  is  more,  without 
any  change  in  the  relation  of  the  banks  to  the  treasury, 
a  rise  in  the  market  rate  of  interest  (a  matter  wholly 
beyond  the  control  of  either  banks  or  treasury)  would 


PROFIT  ON  ISSUING  NOTES  241 

have  the  effect  of  reducing  the  profits  arising  from  cir- 
culation. To  illustrate:  suppose  the  rate  of  interest 
became  7  instead  of  6  per  cent.,  in  the  above  computa- 
tion; then  the  $100,000  could  be  loaned  directly  for 
$7,000  without  the  owners  of  it  going  through  the 
ceremony  of  becoming  a  bank,  or  being  examined  by  a 
government  officer.  Of  course,  the  $73,500  would 
likewise  be  loaned  for  $5,145;  but  the  final  profit  from 
circulation  would  be  only  $1,164,  instead  of  $1,429, 
when  the  rate  of  discount  was  6  per  cent.  This  will 
therefore  show  that  an  increase  in  the  rate  of  loans  in 
the  money  market  reduced  the  profit  arising  solely 
from  bank  circulation. 

But,  supposing  the  rate  of  discount  to  remain  the 
same,  a  change  in  another  element  may  produce  a 
similar  effect.  If  the  banks  were  obliged  to  deposit 
bonds  bearing  3  per  cent,  interest,  instead  of  4  per 
cent.,  then  the  item  of  $4,000  in  the  above  computation 
would  be  changed  to  $3,000.  This  would  reduce  the 
net  receipts  to  $6,429,  and  leave  only  $429  as  the  profit 
which  would  be  lost  by  withdrawing  circulation.  So 
that,  if  it  should  happen  that  the  interest  on  the  bonds 
were  to  be  decreased  by  a  refunding  bill  simultaneously 
with  a  rise  in  the  market  rate,  the  profit  would  wholly 
disappear  between  these  two  millstones.  It  must  be 
clear,  then,  that  the  profit  on  circulation  depended 
both  on  the  market  rate  of  loans  and  the  rate  of  in- 
terest paid  by  the  government  on  the  bonds  required 
as  a  deposit  to  secure  circulation. 


242  MONEY  AND  PRICES 

§  3.  But  still,  a  consideration  wholly  apart  from 
the  mere  rate  of  interest  on  the  bonds  deposited  would 
have  affected  the  profit  on  circulation.  Then  the  banks 
could  deposit,  to  secure  circulation,  any  United  States 
bonds,  of  whatever  description.  This  was  an  important 
provision  when  great  changes  were  going  on  in  the 
form  of  our  bonded  indebtedness,  either  (1)  because 
the  bonds  were  soon  to  fall  due,  or  (2)  because  of  a 
change  in  the  market  rate  of  interest.  For,  in  the  first 
place,  as  the  date  of  payment  of  a  maturing  bond 
draws  near,  it  gradually  falls  in  value  to  the  par  which 
will  be  paid  for  it  by  the  government,  even  though  it 
may  be  a  bond  bearing  a  higher  rate  of  interest  than 
a  new  one  proposed  to  be  substituted  for  it.  The 
"sixes  of  1880"  were  bonds  bearing  6  per  cent,  interest, 
but  as  they  fell  due  in  December,  1880,  they  gradually 
came  to  be  worth  only  their  par  value  ($100),  while  a 
4  per  cent,  bond,  but  just  issued,  was  worth  $112. 
At  the  same  rate  of  interest,  a  bond  running  for  a 
long  term  of  years  is  better  for  an  investment  than  one 
for  a  short  term.  The  lumberman,  who  looks  at  two 
trees  of  equal  diameter  at  the  base,  estimates  the  total 
value  of  each  according  to  the  height  of  the  tree. 
Then,  again,  a  bond  running  for  a  short  term  may  be 
worth  less  than  one  for  a  long  term,  even  though  the 
first  bears  a  higher  rate  of  interest.  That  is,  to  re- 
sume our  illustration,  one  tree,  not  rising  very  high, 
although  larger  at  the  bottom,  may  not  contain  so 
many  feet  of  lumber  as  another,  with  perhaps  a  less 


CURRENT  RATE  OF  INTEREST  243 

diameter  at  the  bottom,  but  which  stretches  much 
higher  up  into  the  air.  This  briefly  explains  the  effect 
of  its  term  on  the  value  of  a  bond. 

But,  in  the  second  place,  the  market  value  of  a 
bond  fluctuates  with  changes  in  the  commercial  rate 
of  discount.  If  a  4  per  cent.  United  States  bond 
should  sell  at  par,  it  means  that  4  per  cent,  is  the  high- 
est rate  to  be  obtained  in  perfectly  safe  investments; 
but  if  the  rate  paid  by  such  investments  should  decline, 
say,  to  3  per  cent.,  the  bond  which  regularly  returns 
$4  a  year  to  its  holder  pays  a  rate  higher  than  can  be 
got  for  other  equally  safe  securities,  and  consequently 
rises  in  its  value  beyond  par  to  such  a  figure  (about 
$118)  that  $4  of  interest  on  this  last  sum  is  equal 
merely  to  the  usual  3  per  cent,  to  be  got  in  the  money 
market;  that  is,  the  holder  of  the  4  per  cent,  bond 
can  sell  it  so  much  above  par  that  the  buyer  can  get 
in  the  $4  (of  annual  return)  only  3  per  cent,  on  the 
amount  paid  for  the  bond.  In  short,  all  bonds,  securi- 
ties, stocks,  land,  or  any  transferable  investment  yield- 
ing a  regular  income  rise  or  fall  in  their  selling  price 
with  the  customary  rate  of  loans  in  the  community. 
If  a  piece  of  rented  land  yield  to  the  owner  $100  a 
year  on  an  investment  of  $1,000,  or  10  per  cent.,  and 
if  other  persons  can  now  get  but  5  per  cent.,  then  the 
owner  could  sell  his  land  for  $2,000;  because  the  same 
annual  return  of  $100  would  give  5  per  cent,  on  $2,000, 
the  usual  rate  of  interest.  So  that,  without  any  change 
in  its  actual  income,  the  land  has  risen  in  its  capitalized 


244  MONEY  AND   PRICES 

value,  only  because  of  the  change  in  the  usual  rate  of 
interest.  In  this  way  the  United  States  4  per  cent, 
bonds,  which  were  at  first  sold  at  par  (or  a  very  slight 
premium),  had  risen  in  value  from  $100  to  $116  or 
$117.  The  price  of  such  a  bond,  therefore,  was  a 
measure  of  the  market  rate  of  interest  on  safe  securi- 
ties. At  the  time  when  the  refunding  bill  was  before 
Congress  these  bonds  were  worth  112  or  114,  realizing 
to  the  investor  about  3X  per  cent.  These  brief  ex- 
planations will  perhaps  make  it  clear  that  United  States 
bonds  have  been  constantly  fluctuating  in  value,  either 
(1)  because  some  bonds  are  falling  due,  or  (2)  because 
the  market  rate  of  loans  varies  with  the  state  of  trade 
and  general  causes.  It  is  to  be  observed,  also,  that 
some  changes  in  the  value  of  the  bonds  were  due  to 
the  action  of  the  government  itself,  and  to  causes  en- 
tirely outside  of  the  control  of  the  banks. 

The  banks  had  been  charged  with  reducing  circula- 
tion merely  in  order  to  speculate  on  bonds.  But  if 
the  premium  on  their  deposited  bonds  rose,  it  prac- 
tically amounted  to  these  bonds  costing  them  just  that 
much  more;  for  they  had  securities  in  the  hands  of 
the  government  which  they  could  at  any  moment  sell 
for  the  increased  value.  Then  it  follows  that  the  profit 
of  a  bank  on  its  circulation  may  be  diminished  by  a 
rise  in  the  value  of  the  deposited  bonds.  It  may  be 
objected,  however,  that  the  banks  have  gained  by  the 
rise  in  value  while  they  held  the  bonds.  True,  but 
they  would  have  profited  likewise  by  investing  their 


DISPOSAL  OF  BONDS  245 

funds  in  bonds,  purely  as  dealers  in  securities,  without 
entering  the  banking  system.  They  do  not  get  that 
increase  simply  because  they  sent  in  bonds  to  secure 
their  circulation;  hence  it  cannot  be  said  that  the  gain, 
in  any  sense,  is  derived  wholly  from  circulation,  or 
because  they  are  national  banks.  If  the  circulation 
were  discontinued,  that  opportunity  for  profit  would 
not  disappear,  and  so  it  is  no  inducement  to  continue 
note  issues.  The  privilege  which  banking  capital  will 
always  claim  is  that  of  holding  its  funds  with  such  free- 
dom that  it  can  turn  them  in  any  direction  where  the 
market  offers  the  best  return.  If  Congress  were  to  ask 
the  national  banks  to  lock  up  their  bonds,  they  would 
be  required  to  forego  a  reward  enjoyed  by  other  cap- 
ital, and  there  would  be  a  positive  disadvantage  in  re- 
maining in  the  national  banking  system. 

§  4.  A  short  time  before  the  introduction  of  the 
refunding  bill,  the  machinery  of  the  banks  with  which 
Congress  tampered  so  rudely  consisted  of  over  2,000 
institutions,  with  a  circulation  of  over  $300,000,000,  a 
capital  of  over  $500,000,000,  deposits  of  about  $900,- 
000,000,  and  loans  of  over  $1,000,000,000;  but  all  these 
banks  together  had  only  $56,000,000  of  legal-tender 
notes  and  the  small  sum  of  $18,000,000  of  their  own 
circulating  notes,  among  their  resources.  To  the  in- 
experienced, however,  these  very  figures  might  give 
some  reason  for  the  constant  tirades  by  certain  con- 
gressmen against  the  growth  of  the  money  power,  and 


246  MONEY  AND  PRICES 

the  fear  that  it  was  fastening  its  monopolistic  fangs  on 
the  heart  of  the  country.  Yet  when  it  is  recalled  that 
the  number  of  banks,  the  amount  of  deposits  and  loans 
(except  in  times  of  speculation),  are  the  result  of  and 
are  in  direct  proportion  to  the  growing  wealth  and 
prosperity  of  the  whole  business  community,  an  at- 
tempt to  "crush  out"  the  banks  is  as  if  a  horse-breeder, 
on  finding  that  some  of  his  colts  are  developing  great 
beauty  and  speed,  should  take  this  as  an  injury  and 
forthwith  cut  their  ham-strings.  Now  this  was  pre- 
cisely the  nature,  strange  as  it  may  seem,  of  much  of 
the  speech-making  on  the  refunding  bill;  but  how  the 
bill  itself  was  a  covert  thrust  at  the  banks,  and  how  it 
brought  on  a  panic,  may  not  have  been  clear  to  the 
general  reader.  A  refunding  bill  was  necessary,  be- 
cause several  classes  of  United  States  bonds,  issued  in 
previous  years,  fell  due  in  1881,  and  authority  had  to 
be  granted  by  Congress,  in  a  new  bill,  to  the  secretary 
of  the  treasury,  to  borrow  funds  wherewith  to  redeem 
them.  Considerably  more  than  $400,000,000  of  5  per 
cent,  bonds  fell  due  May  1,  and  about  $200,000,000  of 
6  per  cent,  bonds  June  30.  Since  these  6  per  cent, 
bonds  were  issued,  twenty  years  before,  our  credit  as 
a  nation  had  so  far  improved  that  a  4  per  cent,  bond 
sold,  at  this  time,  at  a  premium  of  about  112,  which 
implied  that  an  investor  in  government  bonds  would 
be  satisfied  with  3^  per  cent. 

Without  recounting  details,  a  bill  entitled  An  Act 
to  Facilitiate  the  Refunding  of  the  National  Debt  was 


THE  REFUNDING  MEASURE  247 

introduced  (February,  1881)  into  the  House  of  Rep- 
resentatives by  the  Committee  on  Ways  and  Means. 
The  first  section  authorized  the  issue  of  $400,000,000 
of  3  per  cent,  bonds,  payable  in  five  years,  at  the 
pleasure  of  the  government,  but  which  must  be  paid 
in  ten  years;  and  $300,000,000  of  "certificates"  (mean- 
ing treasury  notes),  redeemable  after  one  year,  but 
necessarily  paid  in  ten  years,  and  bearing  3  per  cent, 
interest.  These  last  were  analogous  to  English  ex- 
chequer bills,  and  were  intended  to  catch  that  large 
amount  of  floating  capital  which  has  not  yet  found 
a  permanent  investment.  The  rate  of  interest  was 
placed  below  the  (then)  market  rate,  and,  instead  of 
compensating  for  this  disadvantage  by  a  long  term,  the 
time  at  which  the  treasury  could  begin  to  redeem  was 
fixed  at  five  years — a  condition  likely  to  lower  the  at- 
tractiveness even  of  a  bond  bearing  a  higher  rate  of 
interest.  The  discussion  in  the  House  centred  almost 
wholly  on  these  points;  and  the  ignorance  developed 
was  considerable,  of  course,  but  not  surprising.  The 
important  part  of  the  bill,  however,  and  that  which 
made  the  refunding  bill  famous,  was  the  fifth,  or  "Car- 
lisle," section;  but  the  discussion  did  not  embrace  its 
probable  results  when  in  operation: 


"See.  5.  From  and  after  the  first  day  of  May,  eighteen 
hundred  and  eighty-one,  the  three  percentum  bonds  au- 
thorized by  the  first  section  of  this  act  shall  be  the  only 
bonds  receivable  as  security  for  national  bank  circulation, 


248  MONEY  AND  PRICES 

or  as  security  for  the  safe-keeping  and  prompt  payment 
of  the  public  money  deposited  with  such  banks;   but 
when  any  such  bonds  deposited  for  the  purposes  afore- 
said shall  be  designated  for  purchase  or  redemption 
by  the  Secretary  of  the  Treasury,  the  banking  associa- 
tion depositing  the  same  shall  have  the  right  to  substi- 
tute other  issues  of  the  bonds  of  the  United  States  in 
lieu  thereof:   Provided,  That  no  bond  upon  which  in- 
terest has  ceased  shall  be  accepted  or  shall  be  continued 
on  deposit  as  security  for  circulation  or  for  the  safe- 
keeping of  the  public  money;    and  in  case  bonds  so 
deposited  shall  not  be  withdrawn,  as  provided  by  law, 
within  thirty  days  after  interest  has  ceased  thereon, 
the  banking  association  depositing  the  same  shall  be 
subject  to  the  liabilities  and  proceedings  on  the  part 
of  the  comptroller  provided  for  in  section  fifty-two 
hundred  and  thirty-four  of  the  Revised  Statutes  of  the 
United  States:  And  provided  further,  That  section  jour 
of  the  act  of  June  twentieth,  eighteen  hundred  and  seventy- 
four,  entitled,  'An  act  fixing  the  amount  of  United 
States  notes,  providing  for  a  redistribution  of  the  na- 
tional bank  currency,  and  for  other  purposes,'  be,  and 
the   same  is  hereby,  repealed;    and  sections  fifty-one 
hundred  and  fifty-nine  and  fifty-one  hundred  and  sixty 
of  the  Revised  Statutes  of  the  United  States  be,  and  the 
same  are  hereby,  reenacted.,y 

The  aim  of  the  first  part  of  the  section  was  to  force 
on  the  banks  the  bonds  which  they  would  not  take 
willingly.  Otherwise,  there  would  have  been  no  reason 
for  the  requirement.  But  the  obligation  to  hold  3 
per  cent,  bonds  on  deposit  in  itself  would  probably  not 
have  produced  any  general  desire  to  withdraw  from 


THREE  PER  CENT.  BONDS  249 

the  national  banking  system.  It  is  true  that  if,  while 
in  receipt  of  only  3  per  cent,  on  their  bonds,  the  banks 
could  loan  funds  at  the  commercial  rate  of  6  per  cent., 
that  of  itself  would  reduce  the  profits  arising  supposedly 
from  circulation  to  less  than  one-half  of  one  per  cent. 
But,  on  the  other  hand,  lenders  of  money  could  not 
be  sure  that  the  average  rate  on  safe  investments  would 
not  continue  to  fall  somewhat,  and  make  3  per  cent,  a 
fair  return.  On  this  chance  the  banks  might  have  been 
willing  to  run  the  risk  of  the  rate  going  the  other  way ; 
that  is,  of  rising  instead  of  falling.  Moreover,  it  does 
not  seem  to  have  been  generally  known  to  the  public 
that  Comptroller  Knox  gave  his  opinion  informally 
to  the  effect  that  the  reading  of  the  first  part  of  the 
section  would  not  require  3  per  cent,  bonds  to  be  sub- 
stituted in  the  place  of  4  per  cent,  or  4^  per  cent, 
bonds,  already  deposited  and  not  redeemable.  So 
that,  as  the  banks,  taken  collectively,  held  nearly  one- 
third  of  their  capital  on  deposit  in  these  two  classes 
of  bonds,  this  proviso  would  create  a  market  at  the 
most,  for  only  about  $60,000,000  of  the  new  bonds. 

By  fixing  the  rate  of  interest  below  the  market  rate, 
and,  in  addition,  handicapping  these  bonds  by  the 
short  term,  thereby  creating  a  situation  which  made 
it  extremely  doubtful  whether  the  new  loan  would  be 
taken  up,  and  expressing  beforehand  the  lack  of  con- 
fidence of  the  government  in  the  success  of  the  loan  by 
trying  to  force  the  banks  to  subscribe,  Congress  tried 
to  lock  up  the  capital  of  the  banks  invested  in  these 


250  MONEY  AND  PRICES 

deposited  bonds  by  making  it  impossible  to  withdraw 
them.  The  machinery  for  this  purpose  was  contained 
in  the  last  proviso  of  the  fifth  section,  by  which  the 
fourth  section  of  the  Act  of  1874  was  to  be  repealed, 
and  the  sections  5159  and  5160  of  the  Act  of  1864  were 
to  be  re-enacted.  These  last  were  the  provisions,  pre- 
viously explained,  treating  of  the  means  of  reducing 
circulation.  If  this  fifth  section  had  remained  in  the 
bill,  it  would  at  once,  on  its  passage,  have  taken  away 
the  power  of  withdrawing  deposited  bonds  by  sending 
to  Washington  lawful  money  (as  permitted  by  the  Act 
of  1874),  and  would  have  restored  the  old  process  (see 
sections  5159,  5160),  by  which  the  bonds  could  be  with- 
drawn only  after  the  considerable  time  necessary  for 
the  banks  to  present  their  own  circulating  notes.  Prop- 
erty belonging  to  citizens,  and  deposited  at  Washington 
with  the  understanding  that  it  could  be  withdrawn  at 
any  time,  was  to  be  suddenly  seized  (on  the  passage 
of  the  bill),  and  held  for  years;  and  this  retention 
would  prevent  the  banks  from  changing  the  nature  of 
their  investments,  a  power  wholly  indispensable  to  the 
proper  carrying  on  of  the  banking  business.  All  men 
are  guilty  of  a  little  weakness,  to  be  sure,  in  disliking  to 
see  others  seize  their  goods,  and  bankers  are  but  men 
in  charge  of  their  own  and  depositors'  money !  The 
reason  why  there  was  not  greater  indignation  expressed 
by  the  general  public  was  probably  due  to  the  fact  that 
not  one  man  in  a  hundred  understood  what  was  going 
on,  while  bankers  did,  and  refused  to  be  robbed.    If 


REFUNDING  BILL  251 

the  3  per  cent,  bond  changed  in  value  by  the  opera- 
tion of  natural  causes,  the  banks  would  not  have  had 
the  power  of  withdrawing  from  their  (voluntary?) 
connection  with  the  government;  all  they  could  do 
would  have  been  to  practise  the  noble  virtue  of  forti- 
tude.1 

History  must  record  with  mortification  that  the  bill 
was  passed  in  this  shape  by  the  House,  and  sent  to  the 
Senate,  where  it  was  generally  believed  by  the  country 
that  it  would  be  changed  in  the  interests  of  sound 
finance;  that  the  rate  of  interest  on  the  bonds  would 
be  raised  to  3  J/2  per  cent.,  and  the  extraordinary  fifth 
section  struck  out  as  disgraceful.  It  seems  as  if  there 
was  a  spice  of  irony  in  entitling  the  bill  An  Act  to 
Facilitate  the  Refunding  of  the  National  Debt.  The 
finance  committee  of  the  Senate  (of  which  Mr.  Bayard 
was  chairman)  reported  the  bill  to  that  body,  with  the 
expected  changes.  Secretary  Sherman  had  appeared 
before  the  committee  and  given  his  reasons  why  he 
thought  a  3  per  cent,  bond  would  not  be  successful. 
Estimating  the  market  rate  of  interest  at  $%  per  cent., 
on  the  basis  of  the  price  of  4  per  cent,  bonds,  he  pre- 


*It  is  to  be  observed,  also,  that  the  re-enactment  of  sections  5159,  5160 
would  have  restored  the  requirement  that  one-third  of  the  capital  should 
be  kept  in  bonds  at  Washington  (whether  notes  were  issued  or  not),  and 
repealed  the  Act  of  1784,  by  which  a  fixed  amount  of  not  less  than  $50,000 
(no  matter  what  the  capital)  should  be  kept  by  each  bank.  A  large  bank 
(like  the  Chemical  Bank  of  New  York),  which  had  previously  cared  nothing 
for  circulation,  and  withdrawn  all  its  bonds  down  to  $50,000,  would  have 
had  to  add  a  very  large  sum  in  bonds  in  order  to  raise  the  amount  to  one- 
third  of  its  capital,  and  so  be  forced  to  take  circulation,  whether  willing  or 
not. 


252 


MONEY  AND  PRICES 


sented  tables  to  show  what  the  value  of  3  per  cent, 
and  3^2  per  cent,  bonds,  respectively,  would  be  at 
certain  terms  in  the  future. 


Years  to  run  to 

Corresponding 
price  of  3  per 

Corresponding 
price  of  3^  per 

payment 

cent,  bonds 

cent,  bonds 

1 

99.76 

100.24 

2 

99  So 

100.48 

3 

99  30 

100.71 

4 

99.10 

100.93 

5 

98.90 

101.15 

6 

98.60 

101.35 

7 

98.50 

101.55 

8 

98.30 

101 . 75 

9 

98.10 

101.90 

10 

97.90 

102.10 

IS 

97-oS 

102.90 

20 

96.30 

103.70 

30 

95  20 

104.80 

5°  _ 

93  80 

106.20 

Perpetuity 

92.30 

107.70 

The  second  column  shows  to  the  eye  that  an  arrange- 
ment which  ties  up  a  man's  funds,  so  that  he  loses 
something  each  year,  is  worse  just  in  proportion  to 
the  number  of  years  he  is  required  to  lose;  while  the 
third  column,  on  the  other  hand,  shows  that  if  the 
market  rate  is  3X  per  cent.,  a  3^  per  cent,  bond  is 
worth  a  slight  premium  at  the  start,  and,  as  it  returns 
each  year  more  than  the  ordinary  rate,  it  is  worth 
more  the  longer  it  continues  to  pay  this  higher  rate. 

§  5.  Despite  these  lessons  in  finance,  the  Senate, 
on  the  1 8th  of  February,  1881,  rejected  the  amend- 
ments of  the  finance  committee,  and  passed  the  bill  as 


THE  COUNTRY  AROUSED  253 

it  came  from  the  House  with  slight  alteration.  Be- 
sides one  or  two  minor  matters,  the  term  was  changed 
from  five-to-ten  years  to  five- to- twenty  years;  but 
what  is  painful  to  recall  is  that  the  fifth,  or  "Carlisle," 
section  was  retained  in  the  bill  by  a  vote  of  thirty-two 
to  twenty-nine.  The  few  amendments,  however,  re- 
quired the  bill  to  go  back  to  the  House  for  their  concur- 
rence before  it  could  be  sent  to  President  Hayes  for 
his  signature  and  finally  become  a  law.  This  parlia- 
mentary delay  gave  the  banks  time  to  awake  from 
their  sense  of  security,  caused  by  the  general  feeling 
that  the  Senate,  at  least,  would  be  honest.  In  the 
House,  the  element  which  fifteen  years  before  was  in- 
flationist, four  years  before  rabid  silver  men  (led  by 
Ewing,  Weaver,  Bland,  and  De  la  Matyr),  was  anx- 
ious to  push  the  bill,  and  "stab  the  money  power" — 
as  if  the  "  money  power  "  did  not  include  the  sav- 
ings of  the  industrial  classes,  even  including  poor 
washerwomen  and  sewing-girls,  who  were  thus  repre- 
sented as  constituting  a  "menace  to  our  liberties." 
Finally,  the  whole  country  was  stirred,  and  protests 
against  the  fifth  section  began  to  pour  in  at  Washing- 
ton; and  inasmuch  as  it  required  a  two- thirds  vote  to 
take  up  the  bill  from  the  speaker's  desk  in  preference 
to  other  business,  then  fast  accumulating  at  the  end 
of  the  session,  it  seemed  for  a  short  time  as  if  it  would 
be  difficult  to  push  the  bill  through  the  House.  But 
after  several  days  of  manoeuvring  the  friends  of  the 
measure  gained  their  point. 
Now,  however,  since  the  banks,  under  the  existing 


254  MONEY  AND  PRICES 

law,  had  the  power  to  withdraw  their  bonds  at  any 
moment  by  the  deposit  of  legal-tender  notes,  rather 
than  be  caught  in  a  trap  by  the  refunding  bill,  they 
found  themselves  obliged  to  alter  the  whole  character 
of  their  present  business — a  very  serious  step,  but  one 
to  which  they  were  inevitably  driven.  As  honest  men, 
the  officers  of  the  banks  had  no  choice  but  to  act  so 
as  to  prevent  the  virtual  confiscation  of  a  part  of  the 
property  of  their  shareholders.  The  law  could  not 
compel  them  to  issue  circulation  any  more  than  it 
could  force  farmers  to  plant  thistle  seed  in  their  wheat- 
fields.  In  short,  Congress,  either  not  knowing  what 
it  was  about,  or  being  maliciously  disposed,  really 
forced  a  sudden  contraction  of  the  currency,  even 
against  the  will  of  the  banks.  The  result  was  a  panic. 
Men  who  want  capital  go  to  a  bank,  just  as  a  man 
who  wants  corn  goes  to  a  grain  store.  It  is  hardly 
necessary,  also,  to  point  out  that  modern  business  is 
largely  done  upon  credit.  A  firm  with  a  capital  of 
$10,000  does  a  legitimate  business  of  ten  times  that 
amount.  Men  buy,  agreeing  to  pay  at  a  fixed  time 
in  the  future;  and  they  sell  goods,  to  be  paid  for  in 
the  same  way.  So  that,  although  a  man  is  perfectly 
solvent,  his  receipts  may  be  so  affected,  temporarily, 
that  he  may  need  a  loan  for  ten,  thirty,  or  sixty  days, 
until  his  own  collections  are  made.  If  the  banks,  in 
such  cases,  are  suddenly  unable  to  loan,  it  is  as  if  the 
human  heart  should  cease  to  warm  and  support  the 
members  of  the  body.    That  which  for  the  moment 


CONTRACTION  OF  BANK   RESERVES      255 

affects  the  ability  of  the  banks  to  loan  is  the  ratio  of 
their  reserve  to  their  liabilities;  or,  in  other  words, 
the  amount  they  keep  on  hand  with  which  to  meet 
any  demands  compared  with  the  amount  of  those 
possible  demands.  By  law  the  national  banks  were 
required  to  hold  their  reserves  in  "lawful  money. " 
Therefore,  anything  which  acted  to  subtract  from  the 
market  the  very  kind  of  currency  kept  as  reserve 
vitally  affected  the  power  of  the  banks  to  loan;  while 
the  only  means  the  banks  had  of  extricating  their 
bonds  from  the  grip  of  the  government,  in  the  few 
days  before  the  refunding  bill  could  become  a  law, 
was  by  sending  lawful  money  to  Washington,  to  be 
locked  up  in  the  vaults  of  the  treasury  until  the 
bank-notes  should  become  mutilated  and  sent  in  for 
redemption,  or  be  purchased  at  a  premium.  Between 
February  19  and  March  4,  one  hundred  and  forty  banks 
had  sent  in  to  the  treasury  $18,819,585.  The  dis- 
appearance of  this  amount  of  money  caused  a  violent 
paroxysm  in  commercial  circles.  Where  a  dam  is 
thrown  across  a  stream,  the  backwater  forms  a  wide 
reservoir,  from  which  a  small  constant  supply  of  water 
is  led  off  through  a  mill-race  to  turn  the  wheel  of  the 
mill.  So  the  banks  form  the  reservoir  of  capital 
(drawn  from  all  classes  in  the  country),  from  which  the 
smaller  stream  needed  for  daily  loans  is  drawn  off  to 
"turn  the  wheels  of  industry."  The  sudden  with- 
drawal of  lawful  money  to  reduce  circulation  was  of 
course  like  shutting  off  the  water  from  the  mill,  and 


256  MONEY  AND  PRICES 

the  wheels  of  industry  were  suddenly  stopped.  The 
usual  indications  of  a  commercial  panic  instantly  ap- 
peared. No  one  had  money  to  loan;  "industrial 
strangulation"  was  going  on;  and  had  the  stringency 
increased,  the  business  of  the  country  would  have  come 
to  a  standstill  in  a  few  days.  Money  was  borrowed 
at  the  rate  of  about  400  or  500  per  cent,  per  annum. 
And  what  is  important  to  note  is  that  the  distress 
which  the  hostile  or  ignorant  element  in  Congress  be- 
lieved they  were  inflicting  on  the  banks  really  passed 
on  to  the  people  in  general,  who  were  powerless  to  help 
themselves.  In  view  of  all  this,  it  seems  almost  in- 
credible that  a  senator  of  the  United  States  should 
rise  in  his  place  and  soberly  propose  the  following  reso- 
lution : 

"That  the  hostile  attitude  assumed  by  the  national 
banks  to  the  refunding  of  the  national  debt  at  a  lower 
rate  of  interest,  and  their  recent  attempt  to  dictate 
the  legislation  of  Congress,  are  contrary  to  the  best 
interests  of  the  people,  and  calculated  to  excite  their 
alarm  for  the  future." 

It  is  as  if  a  burglar  should  declare  it  was  against  the 
best  interests  of  the  community  that  prudent  people 
should  lock  their  doors  and  windows  in  order  to  keep 
him  out  of  their  jewel-boxes.  It  is  not  an  exaggera- 
tion to  say  that  the  "Carlisle  section"  was  a  piece  of 
impudent  bad  faith,  of  that  kind  which  has  always  had 
the  greatest  effect  to  lower  our  credit.    A   nation 


REFUNDING  BILL  VETOED  257 

gains,  even  in  money,  by  being  scrupulously  honest 
and  fastidious  in  dealing  with  its  creditors. 

I  scarcely  need  say  that,  although  the  refunding 
bill  passed  both  Houses  of  Congress,  it  was  promptly 
vetoed  by  President  Hayes,  and  failed  to  become  a 
law.  The  danger  to  the  banks  ceased  at  once,  and 
business  again  went  quietly  on.  We  make  these  things 
possible  in  this  country  by  allowing  the  untrained 
congressional  bull  such  extravagant  smashings  in  the 
financial  china  shop.  But  there  is  little  hope  of  the 
idea  entering  his  shaggy  head  that  some  things  are  of 
too  delicate  mechanism  to  be  brushed  by  a  swing  of 
his  tail.  A  large  number  of  the  charters  of  the  banks 
were  to  expire  in  1884,  and  a  better  attitude  was  neces- 
sary to  maintain  a  good  banking  system.  In  view  of 
the  almost  constant  struggle  between  ignorant  legis- 
lation and  our  business  prosperity,  it  was  well  that  we 
give  very  careful  study  to  the  development  of  war 
banking  methods  now  and  in  the  future. 


CHAPTER  X 
GOVERNMENT   VS.   BANK  ISSUES 

§  i.  While  the  problem  of  the  standard  in  the 
United  States  has  been  largely  settled,  other  monetary 
questions  of  great  importance  still  confront  us.  Cer- 
tain forms  of  our  media  of  exchange,  ultimately  re- 
deemable in  the  standard  coin,  may  be  issued  either 
by  the  government  or  by  the  national  banks  chartered 
by  the  government.  Viewed  in  the  light  of  wisdom 
and  experience,  should  these  notes  be  emitted  by  the 
general  government  or  by  the  banks?  In  spite  of  the 
passage  of  the  Federal  Reserve  Act  it  still  remains 
a  pivotal  monetary  question.  It  is  certainly  a  mo- 
mentous one  deserving  impartial  examination.  We 
may  then  weigh  the  arguments  (i)  for  and  (2)  against 
government  issues  and  those  (3)  against  and  (4)  for 
bank  issues. 

Leaving  out  of  account  inconvertible  paper,  it  has 
been  claimed  that  the  issue  of  convertible  paper  by 
the  general  government  would  be  a  saving  to  the  peo- 
ple. It  is  assumed  that  in  issuing  paper  money  a 
profit  exists  which  should  be  reaped  by  the  State. 
Obviously,  every  country  must  invest  a  certain  part 

of  its  wealth  in  its  machinery  of  exchange;   and  it  is 

258 


CONVERTIBLE  PAPER  259 

economy  to  keep  this  investment  as  small  as  possible 
consistent  with  the  highest  efficiency.  Convertible 
paper  is  resorted  to,  not  because  of  a  scarcity  of  gold, 
but  because  it  saves  the  expense  of  using  gold;  since 
the  reserves  for  preserving  convertibility  need  not  be 
more  than  40  or  50  per  cent.  The  interest  on  the 
difference  between  the  total  amount  of  paper  and  the 
reserves,  therefore,  represents  the  saving  in  question. 
This  difference  can  be  set  free  to  be  used  in  industry, 
and  the  earnings  on  it  constitute  the  country's  saving 
in  issuing  paper  in  place  of  gold.  The  saving,  of 
course,  is  only  the  interest  on,  not  the  whole  of,  the 
difference. 

The  validity  of  this  theory  can  be  tested  by  our 
actual  experience  with  the  greenbacks,  which  were 
inconvertible  from  1862  to  1878,  and  convertible  from 
1879  to  the  present  time.  Assuming  a  reserve  of 
$150,000,000  in  gold  to  be  necessary  for  the  redemp- 
tion of  our  $346,681,016  of  greenbacks,  we  may  say, 
in  round  numbers,  that  $200,000,000  is  the  amount  of 
the  uncovered  issues,  on  which  the  interest  at  3  per 
cent,  (at  which  any  gold  bond  in  time  of  peace  could 
be  easily  floated)  would  be  $6,000,000.  This  last  sum 
represents  the  annual  gross  gain  to  the  people  if,  on 
other  grounds,  it  should  be  regarded  as  best  to  sup- 
plant a  gold  currency  by  a  convertible  paper  issued  by 
the  government.1 

1  In  reality,  the  gain  from  using  the  convertible  paper  is  not  a  positive 
gain,  but  only  the  reduction  of  a  loss.  Suppose  all  the  wealth  of  the  coun- 
try to  be  earning  3  per  cent.    Take  out  of  this  total  the  sum  of  $350,000,000, 


260  MONEY  AND  PRICES 

Immediately,  however,  the  question  is  raised:  Does 
it  cost  anything  to  maintain  the  reserve?  Of  course, 
the  political  or  financial  management  of  the  state, 
whether  good  or  bad,  will  directly  influence  the  ability 
of  the  state  to  keep  its  reserves  intact.  Any  policy 
which  excites  distrust  as  to  the  willingness  or  ability 
of  the  treasury  to  redeem  its  paper  in  gold  will  create 
activity  in  the  presentation  of  its  notes  for  coin.  Only 
on  the  assumption  that  the  government  will  always  be 
wise  and  capable  will  the  reserves  always  remain  in- 
tact. If  not,  the  reserves  will  be  drawn  down,  and 
new  loans  must  be  made  in  order  to  supply  additional 
gold  for  the  reserves.  But  our  monetary  policy  has 
not  always  been  wise :  it  has  often  been  cranky,  foolish, 
and  most  ill-judged.  Our  national  vagaries  with  silver 
were  known  the  world  over.  Hence,  it  was  inevitable 
that  the  people  should  have  had  to  pay  the  price.  In 
truth,  so  often  and  great  was  the  fear  that  we  could  not 
maintain  gold  payments  that  several  times  the  gold 
reserves  were  almost  exhausted.  Our  foolishness  re- 
duced to  figures  means  that,  to  maintain  a  reserve  for 
$346,681,016  greenbacks,  we  have  had  to  increase  the 
public  debt  by  $357,815,400,  on  which  the  additional 

which  is  used  in  the  form  of  a  gold  currency,  and  while  so  used  yields  no 
concrete  returns.  The  total  loss,  or  price,  which  the  country  pays  for  a 
currency  consisting  entirely  of  gold  is  the  3  per  cent,  on  this  $350,000,000, 
or  $10,500,000.  But,  if  this  $350,000,000  is  partly  economized  by  using 
$200,000,000  of  convertible  paper,  $200,000,000  is  released  to  go  back  to 
productive  industry;  hence  the  loss  to  the  community  is  reduced  to  3  per 
cent,  on  $150,000,000,  or  only  $4,500,000.  The  so-called  gain  of  $6,000,000 
annually,  which  is  the  3  per  cent,  on  the  $200,000,000  released,  is  not  a 
positive  gain;  it  is  only  a  reduction  of  the  total  loss. 


FOLLY  OF  "ENDLESS   CHAIN" 


261 


interest  charges  to  the  taxpayer  are  $i5,632,6i6.1 
Thus,  as  against  the  reduction  of  loss  by  $6,000,000, 
the  issues  of  the  government  have  entailed  an  enormous 
annual  expense  of  $15,632,616.  It  does  not  do  to 
base  expectations  solely  on  theory.  Indeed,  it  is  a 
serious  question  whether  our  governing  class  is  suffi- 
ciently intelligent  in  managing  monetary  matters  to 
allow  our  nation  to  issue  paper  money  except  at  a 
fearful  cost  to  the  people. 

But  the  above  statement  of  the  cost  is  not  all.  The 
iniquitous  act  of  March  31,  1878,  required  that  the 
notes  redeemed  by  such  a  vast  increase  of  debt  should 
be  reissued.  This  is  the  act  which  created  the  "  end- 
less chain"  and  the  constant  drain  on  the  treasury  in 
time  of  danger.  Consequently  we  have  the  silly  re- 
sult of  having  actually  redeemed  more  than  $407,000,- 
000  of  greenbacks,  by  an  increase  of  debt  ($357,815,400) 
greater  than  the  total  original  issues  of  the  greenbacks 
— and  yet  we  have  the  whole  amount  still  outstanding ! 
It  sounds  childish,  but  it  is  literally  true.  In  fact,  if 
we  had  borrowed  the  $346,681,016  by  issuing  4  per 


1 

Amount  of 
Debt  Created 

Rate  of 
Interest   % 

Interest 
Charge 

1877-78 , 

(  $65,000,000 

\     30,500,000 

50,000,000 

50,000,000 

62,315,400 

100,000,000 

4 
5 
5 
4 
4 

$2,920,000 
1,220,000 
2,500,000 
2,500,000 
2,492,616 
4,000,000 

February  i,  1894 

November  13,  1894 

February  8,  1895 

February  15,  1896 

Total 

$3S7.8i5.400 

$15,632,''  c6 

262  MONEY  AND  PRICES 

cent,  bonds,  at  the  time  of  resumption,  the  annual  in- 
terest charge  would  have  been  only  $13,876,240,  or  an 
annual  saving  of  $1,765,376  on  the  interest  of  the 
debt  actually  incurred  in  keeping  up  the  reserves.  If 
the  rate  of  interest  on  the  bonds  had  been  3  per  cent., 
the  saving  would  have  been  still  greater.  On  the  face 
of  experience,  at  least  in  the  United  States,  it  can 
scarcely  be  urged  that  there  is  any  gain  to  the  people 
in  issuing  government  notes. 

Still  many  persons  think  that  government  notes 
are  "a  loan  without  interest,"  and  hence  a  saving  to 
the  state.  So  well-known  a  politician  as  Secretary 
Sherman  thought  so;1  but  the  facts  already  given  re- 
move the  whole  basis  for  this  opinion.  It  never  has 
been  shown  that  the  treasury  was  unable  to  borrow 
at  some  rate  at  the  time  (1862)  when  the  first  green- 
backs were  issued,  or  at  any  time  since.  Moreover, 
if  the  state  had  to  borrow,  it  did  not  follow,  therefore, 
that  it  must  borrow  by  issuing  notes;  it  was  egregious 

1  "United  States  notes  are  now,  in  form,  security,  and  convenience,  the 
best  circulating  medium  known.  The  objection  is  made  that  they  are 
issued  by  the  government,  and  that  it  is  not  the  business  of  the  government 
to  furnish  paper  money,  but  only  to  coin  money.  The  answer  is  that  the 
government  had  to  borrow  money,  and  is  still  in  debt.  The  United  States 
note,  to  the  extent  that  it  is  willingly  taken  by  the  people,  and  can,  beyond 
question,  be  maintained  at  par  in  coin,  is  the  least  burdensome  form  of 
debt.  The  loss  of  interest  in  maintaining  the  resumption  fund,  and  the 
cost  of  printing  and  engraving  the  present  amount  of  United  States  notes, 
are  less  than  one-half  the  interest  on  an  equal  sum  of  4  per  cent,  bonds. 
The  public  thus  saves  over  $7,000,000  of  annual  interest,  and  secures  a 
safe  and  convenient  medium  of  exchange,  and  thus  the  assurance  that  a 
sufficient  reserve  in  coin  will  be  retained  in  the  treasury  beyond  the  temp- 
tation of  diminution,  such  as  always  attends  reserves  held  by  banks."— 
Report  of  Secretary  of  Treasury,  1880,  p.  xv. 


LOAN  ON  DEMAND  263 

folly  to  borrow  in  the  form  of  paper  money,  which  was 
certain  to  disturb  the  standard  of  value,  change  con- 
tracts, cause  an  upheaval  of  prices,  and  create  riotous 
speculation.  Indeed,  a  loan  put  out  in  the  form  of 
demand  notes  is  highly  objectionable  as  compared  with 
a  loan  in  the  form  of  bonds  issued  for  a  term  of  years. 
The  demand  obligations  may  be,  and  generally  are, 
presented  for  payment  in  times  of  distrust  and  danger, 
just  when  their  redemption  by  the  treasury  is  most 
difficult,  and  when  their  conversion  adds  to  the  severity 
of  a  crisis.  On  the  other  hand,  a  loan  on  time  in  the 
form  of  bonds  gives  no  trouble  beyond  the  payment 
of  interest,  and  is  not  turning  up  at  critical  emergencies 
to  be  redeemed.  Even  if  the  cost  to  the  people  of 
both  methods  were  the  same,  the  latter  method  of 
borrowing  should  be  recommended  on  every  ground  of 
theory  and  experience.  Indeed,  the  confusion  of  mind 
between  the  fiscal  and  the  monetary  functions  of  the 
treasury  is  highly  dangerous;  the  two  should  be  kept 
widely  separated. 

§  2.  Without  doubt,  the  least  recognized,  and  yet 
the  most  far-reaching,  consideration  involved  in  dis- 
cussing government  issues  is,  as  already  noted,  the 
failure  to  separate  the  monetary  from  the  fiscal  func- 
tions of  the  treasury.  Almost  all  our  monetary  ills 
from  1862  to  1900  can  be  traced  to  it.  The  crude  idea 
that,  when  funds  were  urgently  needed,  they  could  be 
obtained  by  issuing  demand  obligations  bearing  no 


264  MONEY  AND  PRICES 

interest,  which  could  be  circulated  as  money,  has  long 
been  prevalent,  and  has  produced  endless  trouble. 
Ignorant  of  the  principles  regulating  the  monetary  sys- 
tem of  a  country,  the  treasury  might,  solely  from  a 
need  of  income  which  has  no  relation  whatever  to  the 
demands  of  trade  for  a  medium  of  exchange,  inject 
additional  sums  of  money  into  the  circulation,  and 
upset  the  whole  delicate  machinery  of  exchanging 
goods.  Foolishly  to  unsettle  the  monetary  standard 
and  the  confidence  of  the  public  by  trying  to  borrow 
in  a  form  certain  to  interfere  with  the  nation's  currency 
is  only  a  way  of  crippling  the  power  to  borrow  in  gen- 
eral. Thus,  two  evils  result  from  this  fateful  confusion 
of  mind:  (1)  changing  the  supply  of  money  without  any 
adjustment  to  the  needs  of  trade  is  a  blow  at  the  very 
vitals  of  exchange,  prices,  contracts,  and  business  secu- 
rity; and  (2)  the  credit  of  the  treasury  being  dependent 
on  its  management  and  resources,  the  issue  of  paper 
money  is  a  blow  at  credit,  because  it  is  an  open  con- 
fession of  inability  to  borrow  in  the  market  on  normal 
conditions.  Because  the  government,  in  1862,  when 
borrowing  had  not  yet  been  fully  tried,  issued  incon- 
vertible notes,  without  providing  any  reserves  what- 
ever, it  could  not  escape  the  charge  of  having  descended 
to  the  last  resort  of  a  bankrupt  treasury;  and  this 
unwise  action  enormously  injured  the  credit  of  the 
United  States  and  increased  the  rate  at  which  it  was 
subsequently  forced  to  borrow.  There  is  only  one 
way  to  borrow:   that  is,  to  pay  the  price  fixed  by  the 


GOVERNMENT  PAPER  A  MENACE        265 

credit  of  the  borrower  in  the  open  market.  From  this 
there  is  no  appeal.  Indeed,  the  depreciated  paper 
caused  to  the  Union  a  loss  of  at  least  $500,000,000  in 
the  creation  of  additional  debt  due  to  higher  prices, 
speculation,  and  the  diminished  amount  received  for 
bonds  due  to  a  damaged  credit.  In  no  way  can  the 
facts  of  our  experience  support  borrowing  by  issuing 
forms  of  money. 

§  3.  Cest  le  premier  pas  qui  coute.  Once  a  false 
step  has  been  taken,  it  is  apt  to  lead  to  serious  conse- 
quences. The  very  existence  of  paper  issues,  originat- 
ing in  a  wrong  method  of  borrowing,  is  a  constant 
menace.  The  mere  lapse  of  time  in  which  no  injury 
has  been  incurred  unfortunately  serves  to  lull  the  fear 
of  danger.  If  retained,  such  issues  are  a  suggestion 
for  similar  crude  expansions  in  the  future,  when  men 
are  too  excited  to  judge  calmly  of  their  acts.  Their 
very  presence  is  an  incentive.  If  legislators  were  all 
monetary  experts,  and  never  influenced  by  political 
considerations,  there  would  be  little  risk  in  retaining 
for  a  time  our  greenbacks;  but  we  must  take  men  as 
they  are,  and  provide  for  the  probable  acts  of  those 
who  are  incompetent  and  ill-advised.  Obviously, 
these  national  guardians  of  our  monetary  system  do 
not  personally  lose  anything  when  they  get  the  treasury 
into  desperate  straits;  they  have  no  weight  of  respon- 
sibility due  to  any  personal  relation  to  the  issues — 
thus  being  quite  differently  affected  from  the  bankers 


266  MONEY  AND  PRICES 

in  their  relation  to  bank  issues.  Humiliating  as  it 
may  seem,  the  maintenance  of  the  convertibility  of 
greenbacks  into  gold  has  again  and  again  been  im- 
perilled. The  whim  of  the  executive,  or  the  sudden 
use  of  an  unreasoning  campaign  cry,  may  make  it  im- 
possible to  keep  the  slight  gold  reserves  which  protect 
our  standard  of  value  and  prices.  Until  recently  re- 
demption in  gold  as  against  silver  was  largely  a  matter 
of  the  personal  choice  of  the  executive.  All  in  all, 
the  very  presence  of  government  issues  is  too  much  of 
a  danger  to  be  kept  forever  hanging  over  a  great  com- 
mercial nation. 

What  is  still  more  dangerous  is  the  fact  that  the 
whim  of  the  government  is  the  only  limit  to  its  issues. 
Ordinarily,  sane  business  men  would  concede  that  the 
quantity  of  the  media  of  exchange  should  bear  some 
direct  relation  to  the  amount  of  exchanging  to  be  done. 
In  the  case  of  government  issues,  the  quantity  as  well 
as  the  quality  depend  on  a  vote  of  Congress.  If  a 
fancied  need  presses  upon  men  inexperienced  in  mon- 
etary operations,  especially  if  they  have  been  inocu- 
lated with  the  fallacy  that  the  more  money  a  country 
has  the  better  off  it  is,  there  will  be  excessive  issues, 
followed  by  raids  on  the  reserves.  The  paper  will 
depreciate — and  the  country  will  undergo  rapid  fluc- 
tuations in  prices,  an  unsettling  of  contracts,  a  period 
of  mad  speculation,  leading  to  the  inevitable  ruin  of  a 
commercial  crisis.  These  are  not  matters  of  imagina- 
tion;   they  are  only  mild  descriptions  of  what  the 


FALSE  DOCTRINE  PERSISTS  267 

country  actually  suffered  from  1862  to  1879  because 
of  government  issues.  The  crisis  of  1873  was  directly 
traceable  to  the  speculation  inherent  in  the  fluctu- 
ating greenback  standard  which  followed  the  Civil  War. 
Naturally  enough,  false  doctrines  expressed  in  gov- 
ernment action  may  poison  the  whole  course  of  public 
opinion  for  generations  to  come.  There  was  the  be- 
lief that  a  government  stamp  created  value.  If  so, 
why  did  its  solemn  promises  to  pay,  although  made  a 
full  legal  tender,  depreciate  to  thirty-five  cents  on  the 
dollar?  Then  also  came  the  fallacy  that  the  more 
money  the  more  wealth;  as  if  wealth  came  into  exist- 
ence by  increasing  the  counters  for  wealth.  Again, 
because  paper  was  depreciating  and  prices  were  soar- 
ing, the  conviction  grew  that  prosperity  came  with 
increasing  the  quantity  of  paper  money.  The  fact 
was,  the  prices  rose  to  keep  up  with  the  depreciation 
of  the  standard.  And,  far  and  wide  has  the  belief 
spread  to-day — aided  by  our  experiences  with  the  de- 
preciated greenback — that  prices  depend  upon  the 
quantity  of  money  in  circulation.  Thus  the  ground 
was  prepared  for  the  silver  agitation;  on  the  theory 
that  gold  was  insufficient  in  quantity.  This  whole 
brood  of  heresies  is  traceable  to  the  crude'conceptions 
which  led  Congress  to  attempt  to  borrow  by  issuing 
inconvertible  paper  in  1862. 

§  4.     If  judgment  be  given  against  government  issues 
on  the  grounds  thus  presented,  we  are  next  forced  to 


268  MONEY  AND   PRICES 

weigh  the  claims  for  and  against  the  only  other  alterna- 
tive instrument  to  be  used  as  paper  money — bank- 
notes. 

There  has  come  down  to  us  from  the  State  banking 
orgies  before  the  Civil  War,  as  well  as  from  the  period 
of  depreciated  greenbacks,  a  belief  that  the  right  to 
issue  money  gives  to  the  issuers  the  power  to  control 
the  money  market;  to  put  prices  of  goods  and  securi- 
ties up  and  down;  and  even  to  bring  on  panics.  The 
"money  octopus"  is  supposed  to  work  through  the 
power  to  manipulate  the  issues  of  banks,  and  to  wish 
to  confine  the  sole  right  of  issue  to  the  banks.  The 
problem  we  are  here  discussing  has  nothing  to  do  with 
inconvertible  paper  of  changing  value.  The  real  issue 
is  between  government  issues  and  bank  issues — each 
convertible  into  gold.  Issues  of  either  kind  of  money, 
if  kept  redeemable  in  gold,  would  have  no  greater  effect 
on  prices  than  gold  itself  would  have. 

The  only  way  in  which  the  "money  power"  can  con- 
trol prices  and  securities  is  by  obtaining  control  over 
capital  and  purchasing  power,  and  thus  influencing  the 
demand.  This  purchasing  power  obviously  can  be 
had  by  loans  from  banks.  The  pith  of  the  matter, 
then,  lies  in  the  ability  to  get  loans.  Now,  suppose 
the  "high  financiers"  have  got  the  loans,  where  do 
the  bank  issues  come  in?  Nowhere.  When  a  loan  is 
given,  the  borrower's  deposit  account  is  credited  with 
the  amount.  Then  payments  are  made,  especially  in 
all   large   transactions,   by   checks   on    these   deposit 


BANKS  AND  PANICS  269 

accounts.  No  bank-notes  to  speak  of  are  used.  It 
would  be  an  inconvenience  to  the  borrowers  to  be  forced 
to  take  the  bank's  notes;  and  as  the  profit  to  the  bank 
arose  from  the  discount  on  the  loan,  that  profit  would 
be  realized  just  the  same  whether  the  bank  gave  a 
deposit  and  checking  account  or  whether  it  gave  its 
own  notes.  The  National  City  Bank  of  New  York, 
the  largest  bank  in  this  country,  had  (in  1909)  loans  of 
$135,405,002,  but  it  issued  only  $9,217,497  of  notes. 
All  the  largest  city  banks  have  made  their  profits  and 
accumulated  huge  surpluses  by  use  of  checks  on  de- 
posits, and  with  very  little  use  of  their  note  issues. 
The  same  is  clearly  seen  in  the  accounts  of  the  bank- 
ing department  of  the  Bank  of  England.  Quite  apart 
from  the  issue  department,  it  does  the  main  banking 
work  of  the  greatest  financial  centre  in  the  world  by 
the  use  of  checks  drawn  on  deposits. 

There  may  be  many  persons — of  the  Upton  Sinclair 
type — who  really  think  that  banks  may  wish  to  bring 
on  panics.  A  bank  is  ex  natura  so  placed  that  to  bring 
on  a  panic  would  bring  on  its  own  destruction.  Every 
one  knows  that  in  the  liabilities  of  a  bank  account  ap- 
pear the  items  indicating  its  obligation  to  shareholders 
for  the  capital,  surplus,  and  profits,  as  well  as  the 
items  of  deposits  indicating  its  obligations  to  de- 
positors for  the  sums  left  with  the  bank  which  may 
be  drawn  on  demand.  On  the  other  hand,  the  bank 
lends  its  resources — whether  coming  from  capital  or 
deposits — and  receives  as  its  only  security  promises  to 


270  MONEY  AND  PRICES 

pay  (supported  by  assets)  from  whose  recurring  ma- 
turity its  loans  are  repaid.  If  these  assets,  such  as 
collateral  composed  of  stocks  and  bonds,  or  paper 
based  on  the  sale  of  goods,  should  lose  their  basis  of 
value,  the  banks  would  lose.  They  have  already  given 
the  borrower  the  right  to  draw,  and  they  get  repay- 
ment by  the  borrower  only  in  the  future.  Hence,  the 
only  chance  of  the  bank  to  regain  what  they  have  parted 
with  lies  in  the  possibility  that  the  assets  will  retain 
value  enough  to  cover  the  loans  already  made.  To 
suppose,  therefore,  that  the  banks  should  ever  have  a 
motive  for  bringing  on  a  panic  would  be  like  supposing 
that  a  sailor  afloat  on  the  ocean  in  an  open  boat  would 
have  a  motive  for  punching  a  hole  in  the  bottom  of 
the  boat — the  only  thing  which  saves  him  from  de- 
struction. 

The  popular  supposition  that  the  bankers  gain  a 
special  profit  by  the  issue  of  notes,  which  by  right 
should  go  to  the  government,  is  doubtless  wide-spread. 
In  truth,  there  is  per  se  no  banking  profit  except  that 
arising  from  the  discount  on  loans;  and  since  dis- 
counting, or  lending,  can  go  on  without  issuing  notes 
— as  is  seen  at  all  banks  and  trust  companies  organized 
under  State  laws — then  it  is  patent  that  the  profit 
of  banking  is  not  due  to  the  issue  of  notes.1 

1  For  the  sake  of  brevity  and  clearness,  I  omit  the  claim  that  a  national 
bank  depositing  bonds  to  secure  its  notes  gets  a  profit  both  on  the  bonds 
and  on  the  notes  when  issued.  In  reality,  other  things  being  equal,  a  bank 
which  stays  out  of  the  national  system  can  make  more  profit  than  one  in 
it.  If  each  have  the  same  reserve  of  $100,000,  it  would  support  $400,000 
of  loans  on  a  25  per  cent,  reserve;  and  the  profit  would  be,  say,  6  per  cent. 


NOTES  ISSUED  BY  BANKS  271 

Yet,  even  if  it  were  desirable  to  have  the  banks 
issue  the  paper  money,  it  has  been  claimed  that  the 
banks  would  be  unable  to  issue  enough  money  for  the 
enormous  trade  of  so  great  a  commercial  country  as 
this;  and  consequently,  the  government  is  the  only 
authority  competent  to  meet  so  great  a  task.  Those 
who  think  thus  overlook  the  patent  fact  that  (omitting 
gold)  the  note  issues,  either  of  a  government  or  a  bank, 
are  not  much  used  in  actual  transactions  of  any  im- 
portance. In  fact,  payments  are  usually  made  by 
checks.  Therefore,  the  monetary  service  to  be  per- 
formed is  not  that  coterminous  with  our  trade,  but  a 
service  coterminous  with  the  need  of  reserves  and  of 
those  retail  and  minor  transactions  in  which  buying 
and  selling  are  closed  only  by  the  passage  of  some 
form  of  coin  or  paper  money.  We  may  need  cash  for 
buying  a  railway  ticket,  but  not  for  buying  a  cargo  of 
wheat.  It  is  the  banks  which  supply  a  deposit  cur- 
rency, offsetting  checks  at  clearing-houses,  by  which 
in  the  United  States  over  $250,000,000,000  of  goods 
per  year  are  exchanged,  and  without  recourse  to  silver, 
gold,  bank-notes,  or  greenbacks,  except  for  settling 
small  balances. 


on  $400,000  in  case,  as  of  a  State  bank,  no  notes  were  issued.  But  if  the 
bank  went  into  the  national  system,  and  if  its  borrowers  called  for  notes 
when  a  loan  was  made,  then  the  whole  reserve  must  go  for  bonds  which  at 
best  would  support  only  $100,000  of  notes.  Thus  its  loans  would  be  lim- 
ited to  $100,000,  and  its  gains  would  be  restricted  to  6  per  cent,  on  thai 
sum,  with  a  small  interest  on  the  bonds.  If  it  had  sufficient  discount  busi- 
ness, the  bank  could  earn  much  more  outside  than  in  the  national  system, 
and  wholly  without  the  issue  of  a  single  note.    Cf.  supra,  chap.  IX,  §  4. 


272  MONEY  AND  PRICES 

A  more  interesting  point  is  the  suggestion  that  bank- 
notes are  unconstitutional.  Obviously  this  point  has 
no  reference  to  banks  chartered  by  the  national  gov- 
ernment. That  issue  was  settled  long  ago,  in  1819.1 
If  the  claim  has  any  relevancy,  it  has  it  only  in  regard 
to  notes  issued  by  banks  chartered  by  the  several 
States.  The  Constitution  forbids  States  to  emit  bills 
of  credit,  but  it  does  not  forbid  a  State  to  incorporate 
banking  institutions.  In  constant  practice,  from  the 
beginning,  State  banks  have  been  allowed  to  issue 
notes.  Webster  urged  that  the  power  of  the  general 
government  to  regulate  coinage  included  the  right  to 
supervise  all  State  bank  issues;  and  the  right  of  Con- 
gress to  regulate  the  issue  of  State  banks,  or  tax  them 
out  of  existence,  has  also  been  settled.2  Therefore, 
all  there  is  in  this  objection  applies  only  to  notes  of 
State  banks,  and  in  no  way  affects  the  right  of  national 
banks  to  issue  notes  under  an  act  of  Congress. 

In  favor  of  government  issues  is  the  obvious  claim 
that  they  would  be  uniform  throughout  the  different 
States  of  the  Union,  and  prevent  the  condition  of 
variety  and  depreciation  which  existed  in  the  State 
currencies  before  the  Civil  War.  But  this  admitted 
advantage  in  favor  of  government  notes  is  no  argument 
against  bank-notes,  if  the  latter,  as  in  the  case  of  the 
national  bank  notes,  can  also  be  made  safe,  redeema- 
ble, and  uniform  throughout  the  whole  country. 

1  Veazie  Bank  vs.  Fenno,  8  Wallace,  533. 
xMcCullock  vs.  Maryland,  4  Wheaton,  316. 


WHEN  NOTES  ARE  NEEDED  273 

§  5.  When  we  come  to  positive  arguments  in  favor 
of  assigning  to  banks  the  duty  of  issuing  the  notes 
needed  by  the  trade  of  our  country,  we  are  obliged 
to  ask:  What  other  institutions  than  banks  exist 
which  can  know  when  and  for  how  much  a  demand 
exists  for  notes  in  transactions  which  cannot  be  per- 
formed by  checks?  Certainly,  Congress  cannot  know. 
Whether  we  like  banks  or  not,  the  fact  is  that  they 
are  the  institutions  of  credit,  evolved  by  centuries  of 
experience  to  serve  the  needs  of  trade;  and  whether 
they  like  it  or  not,  the  banks  must  satisfy  these  needs, 
or  cease  to  exist.  Through  them  idle  and  new  funds 
pass  into  the  hands  of  producers;  they  disburse  cap- 
ital; and  they  alone  can  know  in  just  what  way  the 
public  wish  the  capital  transferred  to  it — whether 
through  the  medium  of  gold,  silver,  paper  money,  or 
checks.  In  this  respect  the  bank  is  the  slave  of  the 
business  public.  If  the  public  wish  only  a  deposit 
account,  the  banks  provide  it;  if  they  wish  notes,  the 
bank  must  give  notes. 

If  such  be  the  case,  the  banks  are  the  only  organiza- 
tions which  can  provide  an  elastic  currency.  We  have 
seen  that  the  treasury  cannot  do  it.  As  a  matter  of 
fact,  the  greenbacks  have  been  rigidly  limited  since 
1878.  Although  a  circulation  of  bank-notes  secured  by 
bonds  can  never  be  anything  but  inelastic,  since  the 
amount  of  notes  is  made  to  depend  upon  the  price  of 
bonds  and  the  rate  of  interest,  the  banks  can  be  given 
a  safe  method  of  issues,  quickly  redeemable,  such  as 


274  MONEY  AND  PRICES 

would  provide  the  necessary  seasonal  elasticity  not 
possible  with  government  issues — elasticity,  of  course, 
which  contracts  as  well  as  expands.  Leaving  the 
elasticity  to  the  banks  is  the  only  democratic  way. 
There  could  be  no  overissues  under  a  system  which  pro- 
vides for  immediate  redemption  of  bank-notes  at  many 
centres;  and  they  would  go  out  only  when  there  was 
a  need,  such  for  instance  as  arises  in  the  autumn  har- 
vests. 

Far  different,  however,  from  this  seasonal  elasticity 
is  the  demand  for  elasticity  in  a  time  of  crisis.  In 
such  a  crisis  as  that  of  1907,  when  an  antecedent  ex- 
pansion of  speculation,  undue  rise  of  prices,  and  reck- 
less promotions,  had  paved  the  way  for  disaster,  an 
elastic  currency,  although  it  could  not  have  prevented 
the  panic,  would  yet  have  in  some  measure  modified 
the  severity  of  the  crisis.  In  times  of  emergency  such 
as  this,  instant  response  to  the  need,  and  at  the  spot 
where  the  need  exists,  whether  for  loans  or  for  notes, 
could  have  been  made  only  by  banks  to  their 
borrowers.  Treasury  expansion,  publicly  advertised, 
would  have  been  a  certain  means  of  frightening  de- 
positors and  borrowers,  and  would  only  have  aggra- 
vated the  disaster. 

§  6.  It  being  understood  that  convertibility  into 
gold  is  the  prime  requisite  either  of  government  or 
bank  issues,  it  is  appropriate  to  note  that  the  cost  of 
maintaining  coin  reserves,  which  we  found  to  be  so 
heavy  in  the  case  of  the  greenbacks,  would  be  removed 


CONVERTABILITY  275 

from  the  people  and  put  wholly  upon  the  banks,  were 
the  latter  to  be  required  to  furnish  all  the  notes.  In 
truth,  the  banks  would  never  have  any  real  difficulty 
in  maintaining  gold  payments,  provided  the  govern- 
ment maintained  the  gold  standard  and  redeemed  its 
own  obligations  in  gold.  The  national  bank  note  has 
from  the  beginning  always  been  as  good  as  the  govern- 
ment note  into  which  it  was  convertible;  and  the  most 
significant  thing  in  this  result  is  that  the  national 
bank  notes  have  not  been  and  are  not  now  a  full  legal 
tender.  Clearly  enough,  more  depends  on  redeema- 
bility  than  on  legal  tender. 

If  the  government  at  any  time  needs  gold  it  has  to 
go  to  the  banks  or  to  allied  institutions  to  get  it. 
But  if  the  banks  were  delinquent  in  maintaining  re- 
demption, have  we  any  means  of  compulsion  to  keep 
them  up  to  the  mark?  In  this  respect  the  bank  cer- 
tainly occupies  a  better  position  than  the  government. 
A  bank  failing  to  redeem  can  be  immediately  sued  in 
the  courts,  and  can  be  obliged  to  keep  its  promises  or 
go  into  liquidation.  Not  so  with  the  treasury.  If 
the  treasury  ceases  to  redeem  it  cannot  be  compelled 
to  fulfil  its  obligations  against  its  own  consent.  Only 
if  Congress  permits,  can  the  holder  of  its  note  proceed 
against  the  government  for  failure  to  redeem.  For 
seventeen  years,  1862-78,  the  government  was  in 
fact  derelict  in  paying  coin,  and  was  able  to  do  so 
with  impunity.  The  great  wealth  of  the  country  did 
not  save  us  from  this  ignominy. 

Yet  the  opinion  is  prevalent  that  the  whole  wealth 


276  MONEY  AND  PRICES 

of  the  nation  lies  behind  the  government  paper,  for 
which  the  credit  of  the  country  is  pledged.  Therefore, 
government  issues  would  have  a  greater  safety  than 
those  of  banks.  To  this  it  might  be  said  that  no  boy 
should  be  without  apples  as  long  as  there  are  trees 
full  of  apples  in  well-guarded  enclosures.  There  are  the 
apples;  but  the  boy  does  not  own  them.  How  can  he 
get  what  he  does  not  own?  Similarly,  the  great  wealth 
of  the  country  is  not  owned  by  the  state;  and  the 
state  can  take  that  wealth  only  by  the  forms  of  law 
which  permit  its  acquisition  by  taxation  or  borrowing. 
It  cannot  steal.  Then,  if  there  is  no  limit  to  taxation 
and  borrowing,  say  government-paper  advocates,  the 
state  can  always  secure  gold  enough  to  maintain  its 
paper  at  par.  But  men  do  not  always  do  what  they 
ought  to  do.  Even  if  there  is  boundless  wealth,  but  if 
none  of  it  is  taken  to  secure  the  paper,  the  great  wealth 
of  the  country  adds  no  more  value  to  the  paper  than  a 
summer's  crop  of  thistledown.  Moreover,  the  trea- 
sury may  have  reached  its  limits  of  taxation  and  bor- 
rowing and  can  obtain  nothing  to  be  used  for  the  pro- 
tection of  its  paper  money.  And  since  it  cannot  be 
required  by  court  procedure  to  redeem  its  money,  if 
it  wishes  not  to  redeem,  then  it  is  clear  that  the  char- 
acter of  the  paper  is  dependent  not  on  the  wealth  of 
the  country,  but  on  the  whims  of  Congress  to  whom 
the  currency  is  subject. 

The  case  is  even  more  favorable  for  the  banks  than 
this.    Apply  to  government  paper  the  same  test  as 


NOTE  ISSUES 


277 


that  applied  to  bank-notes.  If  a  bank  issues  its  notes 
as  the  result  of  a  loan,  it  must  receive  assets  in  the 
form  of  promissory  notes  or  securities  as  an  equiva- 
lent. Indeed,  the  quality  of  such  assets  is  constantly 
brought  into  discussion.  A  skeleton  account  of  a  new 
bank  would  show  the  situation: 


Liabilities 

Assets 

Reserves 100,000 

Here  the  issue  of  notes  is  followed  ipso  facto  by  the 
receipt  of  an  amount  of  assets  sufficient  to  secure  the 
repayment  of  the  loans.  With  this  compare  the  op- 
erations of  the  treasury: 


Liabilities 

Assets 

Reserves  (perhaps) 100,000 

By  the  very  nature  of  a  government,  it  does  not 
receive  collateral  when  it  issues  notes.  It  is  not  a 
bank.  It  does  not  get  assets  which  equal  the  sum  of 
note  issues.  As  a  rule,  what  the  government  gets  for 
the  notes  when  issued  is  (as  in  the  buying  of  munitions 
of  war)  consumed,  or  made  unavailable  as  an  asset 
of  value.  And  the  scraping  up  a  gold  reserve  is  re- 
garded as  a  very  virtuous  deed.    Now,  a  bank  which 


278  MONEY  AND  PRICES 

took  the  assets  received  for  its  notes  and  used  them 
up  would  be  jeered  out  of  existence.  But  if  the  di- 
rectors spent  the  $400,000  of  the  bank's  assets  in 
champagne  suppers,  they  would  still  have  quite  as 
good  a  protection  for  the  notes  as  the  treasury. 

In  truth,  bank-notes  can  be  made  as  safe  as  any 
kind  of  money  by  proper  rules  as  to  reserves,  guaranty 
funds,  lien  on  assets,  and  the  like.  The  treasury,  on 
the  other  hand,  is  little  likely  to  submit  to  shackles 
which  are  easily  imposed  on  a  bank. 

Since  the  quality  of  the  government  paper  is  not 
really  maintained  by  the  wealth  of  a  country — any 
more  than  the  thirst  of  a  prisoner  in  a  dungeon  is 
slaked  from  the  cool  lake  he  sees  outside — it  is  obvious 
that  the  value  of  the  paper  is  determined  by  the  action 
of  a  Congress  usually  made  up  of  active  politicians. 
In  short,  government  notes  are  at  the  mercy  of  every 
passing  whim  of  the  voters,  whom  the  politicians  sed- 
ulously court.  Money  should  be  left  to  experts;  but 
in  fact  government  paper  never  can  be  so  left,  as  long 
as  it  is  the  plaything  of  politics.  That  is  the  curse 
of  all  government  issues  of  notes,  just  as  it  is  the  curse 
of  custom  duties  which  are  made  political  issues. 
Therefore,  the  strongest  possible  reason  for  relegating 
the  system  of  paper  issues  to  the  banks,  under  general 
rules  fully  providing  for  elasticity  and  safety,  is  that 
they  would  be  entirely  removed  from  politics.  If  no 
other  argument  were  presented,  this  one  alone,  judging 
not  by  theory  but  by  actual  experience,  should  be 


BANK  ISSUES  279 

sufficient  to  induce  us  to  decide  in  favor  of  bank  issues. 
And  this  conclusion  seems  to  have  been  already  reached 
by  those  great  commercial  nations  which  are  our  closest 
rivals  for  the  trade  of  the  world. 

Thus,  in  the  great  case  of  Government  vs.  Bank 
Issues  before  the  people,  the  jury  ought  to  find  in 
theory  and  in  fact  in  favor  of  the  Bank  Issues.  Such 
a  finding  would  be  a  protection  against  arbitrary  party 
action  by  a  central  government  under  mere  political 
pressure  and  it  would  be  in  line  with  the  democratic 
tendencies  of  the  age. 


CHAPTER  XI 
THE  MONETARY  COMMISSION  OF   1897 

§  i.  Calm  and  yet  friendly  critics  of  democratic 
institutions,  like  Mr.  Lecky  in  his  Democracy  and  Lib- 
erty, have  pointed  out  the  existence  of  unmistakable 
dangers  which  have  appeared  in  the  process  of  our 
political  development.  To  these  dangers  we  are  not 
blind;  but  while  we  always  regard  them  as  serious, 
yet  to  our  American  optimism  they  seem  sporadic  and 
not  chronic.  We  have  fallen  into  the  habit  of  accept- 
ing the  fact  that  American  life  and  ideals  are  not  truly 
expressed  in  our  political  activity,  or  in  our  legislation; 
that  intentions  and  results  are  badly  mated.  The 
superiority  of  our  ideals  over  our  political  action — if 
that  be  granted — seems  to  be  due  to  a  neglect  of  politi- 
cal duties.  The  preoccupation  of  an  intensely  indus- 
trial community,  engaged  in  exploiting  the  amazing 
resources  of  a  new  country,  has  left  us  temporarily 
neglectful  of  our  civic  obligations. 

From  this  point  of  view,  it  is  reasonable  to  suppose 
that  political  indifferentism — sometimes  too  long  con- 
tinued, as  in  the  case  of  an  abiding  endurance  of  bad 
monetary  legislation — must  be  ascribed  to  an  absorp- 
tion of  mind  in  other  directions.    Moreover,  although 

280  ' 


POLITICAL  INDIFFERENCE  281 

the  losses  and  damage  wrought  by  erroneous  politics 
are  extraordinary,  yet  the  return  of  wealth  to  skilled 
human  effort  is  so  great,  and  our  phenomenal  resources 
yield  such  enormous  totals,  that  the  losses  are  accepted 
and  forgotten.  This  way  of  doing  things  may  not  in- 
dicate a  discriminating  and  frugal  mind;  but  it  is  the 
way  that  is  natural  to  an  immature  people  in  the 
midst  of  rapidly  accumulating  riches. 

To  some  minds,  the  stolid  acquiescence  for  decades 
in  vicious  legislation — so  long  endured  that  its  vicious- 
ness  has  become  notorious — seems*  to  be  an  exhibition 
of  American  indifference  so  discouraging  that  we  should 
frankly,  although  reluctantly,  admit  the  "degradation 
of  American  politics"  as  an  inevitable  consequence  of 
democratic  institutions.  There  seems  indeed  to  be  a 
basis  for  such  reflections.  That  a  bad  monetary  system 
like  that  of  the  United  States  should  not  merely  have 
found  a  place  in  our  legislation,  but  should  also  have 
remained  in  force  for  more  than  a  generation,  when 
qualified  observers  at  home  and  abroad  had  repeat- 
edly foretold  disaster;  that  losses  of  untold  millions 
should  have  been  suffered  in  commercial  ruin  directly 
traceable  to  defective  monetary  enactments,  when  the 
application  of  plain  business  principles  would  have 
made  this  damage  impossible;  that  our  country  should 
have  been  painfully  writhing  in  distress  and  weighed 
down  by  industrial  depression  at  the  very  time  when 
foreign  countries  were  recording  the  largest  exports 
and  imports  and  the  greatest  prosperity  in  all  their 


282  MONEY  AND  PRICES 

history — all  this  seems  inexplicable  and  astounding. 
Is  it  any  wonder  that,  by  many  thoughtful  people, 
this  long  continuance  in  a  blundering  and  costly  policy 
by  an  ambitious  country  should  be  regarded  as  proof 
of  a  deep-seated  incapacity  on  the  part  of  a  democracy 
to  successfully  meet  its  problems — to  appreciate,  for 
instance,  the  gravity  and  complexity  of  problems  such 
as  must  arise  in  establishing  a  sound  fiscal  and  mon- 
etary policy,  and  then  rise  to  a  fit  solution  of  them. 

There  are  some  of  us,  however,  who  might  take  a 
more  cheerful  view.  In  spite  of  some  inexplicable 
aberrations  from  sound  judgment,  and  of  some  strange 
hallucinations  for  a  brief  time,  no  estimate  of  the 
American  electorate  is  correct  which  fails  to  recognize 
its  fundamental  good  sense,  honor,  and  intelligence. 
A  sympathetic,  and  therefore  a  truer,  insight  will  lead 
one  to  notice  symptoms  indicative  of  very  sane  and 
healthy  action,  but  which  are  often  overlooked  in  the 
hasty  bustle  of  obtaining  immediate  political  results. 
The  reserve  force  of  right  action  in  the  American  peo- 
ple, which  can  be  called  upon  in  any  great  emergency, 
must  always  be  reckoned  with  by  statesmen.  The 
great  democratic  giant  moves  on  his  busy  way,  ab- 
sorbed in  developing  the  crude  resources  of  a  new 
land,  settling  the  pressing  needs  of  a  new,  but  ambi- 
tious, community,  striding  on  magnificently  to  material 
wealth,  self-centred  and  often  serenely  unconscious 
of  ugly  signs  of  disease,  which,  as  yet,  have  made  little 
or  no  impression  on  his  inner  strength  and  vitality. 


SIGNS  OF  AN  AWAKENING  283 

An  unexpected  tumble,  a  surprising  blow,  now  and 
then,  seem  to  have  no  perceptible  influence  in  retard- 
ing his  ultimate  and  confident  progress.  But  when, 
by  recurring  twinges,  this  big  personality  is  once  made 
fully  conscious  that  something  is  permanently  in- 
jurious to  his  health — when,  for  instance,  he  discovers 
that  his  monetary  diet  gives  him  an  excruciating  colic, 
increasing  in  intensity — we  are  likely  to  witness  the 
direction  of  great  energy  toward  the  discovery  of  a 
cure.  And,  if  I  am  not  greatly  mistaken,  that  is  what 
we  were  able  to  observe  in  the  movement  for  the  re- 
form of  our  monetary  legislation. 

There  arose  unmistakable  evidences  that  the  indus- 
trial interests,  quite  irrespective  of  party  affiliations, 
were  exhibiting  a  change  of  emphasis;  withdrawing 
their  attention,  for  a  time,  from  the  engrossing  tasks 
of  production  and  manufacture  in  order  to  examine 
into  and  remedy  the  dangerous  consequences  of  a 
vicious  monetary  policy.  This  was  a  decidedly  healthy 
and  encouraging  sign.  Our  great  democracy,  noting 
a  pronounced  lassitude  in  its  system,  racked  in  every 
part  of  its  body  by  suffering  and  distress,  stopped  in 
its  onward  strides  in  the  path  of  prosperity,  and  re- 
luctantly admitted  that  it  could  take  up  its  work 
again  only  after  its  disease  had  been  diagnosed  and 
proper  remedies  applied.  Those  of  us  who  despair 
too  easily  of  the  republic  must,  therefore,  be  patient, 
and  allow  time  enough  for  large  forces  to  complete 
the  cycle  of  examination  and  reform.     A  return  to 


284  MONEY  AND  PRICES 

sane  methods  may  be  slow,  but  it  is  inevitable,  if  we 
are  to  remain  a  commercial  nation. 

Foreigners  are  often  pleased  to  speak  condescend- 
ingly of  American  optimism — a  confidence  that,  in 
spite  of  corruption  and  malodorous  administration, 
everything  will  eventually  work  out  a  good  result. 
After  all,  is  this  so-called  optimism  anything  more 
than  a  surer  knowledge  on  the  part  of  those  who  know 
our  democracy  most  truly?  If  it  be  a  fact  that,  as  I 
have  already  observed,  there  is  a  great  reserve  force 
of  good  sense,  honorable  purpose,  and  shrewd  intelli- 
gence among  our  people,  which  in  supreme  crises,  or 
after  long  irritation,  is  sure  to  rise  spontaneously  to 
set  the  nation  aright,  then  we,  who  have  faith  in  our 
country,  are  not  basing  our  hopes  on  imagination  or 
sentiment.  Even  though  the  moral  force  of  the  com- 
munity sometimes  slumbers  until  impatient  persons 
announce  its  extinction,  it  is  still  there,  to  be  awakened 
when  there  is  less  preoccupation  with  the  eager  pur- 
suits of  industry.  It  is  the  peculiarity  of  our  democ- 
racy— hardly  a  vice,  unless  a  habit  of  procrastination 
may  be  called  a  vice — that  time  and  effort  are  needed 
to  awaken  its  consciousness  to  a  proper  understanding 
of  an  evil,  and  to  connect  an  aroused  moral  sense  with 
some  definite  plan  of  legislation. 

It  is  to  be  observed,  moreover,  that  a  passing  craze 
should  not  be  mistaken  for  an  awakening  of  the  public 
consciousness.  A  temporary  flirtation  with  an  issue, 
tricked  out  in  false  braws  to  counterfeit  beauty,  is  not 


MONETARY  REFORM  285 

the  same  as  the  deep  affection  which  guides  permanent 
action.  The  public  may  flirt  with  this  or  that  danger- 
ous issue  for  a  time;  but  a  permanent  alliance  is  out 
of  the  question.  In  our  land,  an  impression  upon  the 
inner  consciousness  by  a  grave  matter  is  slow  and 
difficult.  Geographical  separation  and  diverse  cli- 
mates within  our  own  boundaries  make  practically 
separate  communities,  with  different  feelings  and 
standards,  and  with  diverse  points  of  view.  Hence, 
when  those  who  have  a  common  purpose  to  attain  are 
many  in  numbers,  it  is  difficult  to  find  each  other  out 
and  to  act  in  concert.  This  explains  why  it  is  that 
the  creation  of  a  common  understanding  is  a  slow 
process,  often  obtained  only  through  panics  and  suffer- 
ing, and  that  leadership  and  organization  to  carry  this 
understanding  into  positive  legislation  are  of  first 
importance.  The  mere  fact  that  an  ill  has  been  long 
endured  is  not  in  itself  discouraging;  for  when  the 
existence  of  an  evil  has  once  been  generally  recog- 
nized, the  end  is  not  far,  if  a  leader  appear. 

§  2.  Whatever  the  immediate  causes,  it  will  be 
admitted  by  all  that  the  public  consciousness  had 
been  at  last  thoroughly  awakened  to  the  evils  of  a  bad 
monetary  system — or  rather  lack  of  system.  The 
sufferings  of  the  industrial  organism  were  acute  and 
unprecedented :  the  consciousness  of  disease  was  every- 
where felt.  If  this  be  granted,  the  end  was  not  far 
off.    The  questions  universally  asked  were:   "What  is 


286  MONEY  AND  PRICES 

wrong  ?  What  are  the  remedies  ? ' '  This  in  its  briefest 
form  was  the  raison  d'etre  of  the  Monetary  Commis- 
sion. It  met  to  diagnose  impartially  the  disease,  and 
to  prescribe  the  remedy.  It  was  the  outcome  of  a 
movement  which  reflected  the  healthiest  operations  of 
democracy  that  have  been  observed  in  recent  years. 
It  came  from  the  people,  by  the  people,  and  for  the 
people.  Above  all  party,  above  all  sectional  feeling, 
it  was  in  the  interests  of  the  whole  country,  and  not 
in  the  interest  of  any  one  man,  nor  of  any  particular 
region.  Larger  than  any  one  industry  or  vocation, 
it  was  the  outcome  of  all  industrial  life  throughout 
the  length  and  breadth  of  the  land,  and  stood  for  the 
dignity  of  labor  and  production  when  these  demanded 
the  right  to  be  freed  from  artificial  barriers  to  profita- 
ble and  steady  employment.  It  gave  evidence  of 
the  healthy  condition  of  popular  government.  Stulti- 
fying acquiescence  much  longer  in  a  fatuous  monetary 
policy  might  properly  have  been  regarded  as  proof  of 
the  degeneration  of  our  institutions,  and  of  the  flab- 
biness  of  the  public  conscience.  The  extent  of  this 
movement  among  the  business  interests,  its  spon- 
taneous origin,  its  non-partisan  character,  were  ex- 
ceedingly hopeful.  Although  long  delayed,  it  showed 
itself  so  steady,  so  direct,  so  uncompromising,  that  it 
became  a  wholly  novel  and  unprecedented  part  of 
political  activity.  Never  before  in  our  history  had 
the  business  interests  of  the  country  combined  to  se- 
cure the  formulation  of  a  sound  monetary  system, 


MONETARY  CONVENTION  287 

with  the  evident  purpose  to  follow  the  announcement 
of  that  result  by  a  formidable  campaign  in  every  dis- 
trict and  precinct  of  the  nation.  It  was  a  strong 
demand  based  on  the  dignity  and  self-respect  of  our 
industrial  life. 

On  November  18,  1896,  the  governors  of  the  In- 
dianapolis Board  of  Trade  invited  the  Boards  of  Trade 
of  Chicago,  St.  Louis,  Cincinnati,  Louisville,  Cleveland, 
Columbus,  Toledo,  Kansas  City,  Detroit,  Milwaukee, 
St.  Paul,  Des  Moines,  Minneapolis,  Grand  Rapids, 
Peoria,  and  Omaha  to  a  conference  on  the  1st  of 
December  following,  to  consider  the  advisability  of 
calling  a  larger  convention  from  commercial  organiza- 
tions throughout  the  country  for  the  purpose  of  dis- 
cussing the  wisdom  of  selecting  a  non-partisan  com- 
mission to  formulate  a  sound  currency  system.  This 
preliminary  conference,  after  long  deliberation,  issued 
a  call  for  a  non-partisan  monetary  convention  of  busi- 
ness men,  chosen  from  boards  of  trade,  chambers  of 
commerce,  and  commercial  clubs,  to  meet  in  Indian- 
apolis, on  January  12,  1897.  In  the  call,  attention 
was  drawn  to  the  fact  that  a  necessity  for  such  legis- 
lation as  would  establish  our  currency  upon  a  sound 
and  permanent  basis  was  generally  conceded  by  busi- 
ness men.  In  view  of  what  I  have  said,  it  is  note- 
worthy that  the  call  contained  these  significant  words: 

"The  business  men  have  been  accused  of  neglect  of 
political  duties.     In  ordinary  times  there  may  be  some 


28S  MONEY  AND  PRICES 

foundation  for  this  charge;  but  at  every  critical  junc- 
ture in  the  history  of  our  country,  when  the  nation's 
prosperity,  honor,  or  general  welfare  was  seriously  in 
danger,  they  have,  in  the  spirit  of  enlightened  patri- 
otism, risen  to  the  full  measure  of  their  duty;  and  we 
believe  that  the  painful  experience  of  the  country 
under  the  existing  laws  on  the  subject  of  the  currency 
admonishes  the  business  men  that  we  have  reached  a 
point  where  it  is  their  duty  to  take  an  active  part  in 
helping  to  solve  the  great  questions  involved." 

Here  is  the  evidence  that  the  public  consciousness 
had  been  awakened. 

At  the  convention,  held  January  12,  1897,  there  as- 
sembled, with  credentials,  two  hundred  and  ninety- 
nine  delegates — men  of  high  character  and  distinction 
— representing  business  organizations  and  cities  in 
nearly  every  State  in  the  Union.  Indeed  seldom  had 
a  more  influential  body  of  men  of  experience  and  ability 
been  brought  together.  The  result  of  its  deliberations 
was  expressed  in  resolutions  conveying  the  idea  that 
no  progress  could  be  made  until  a  definite  plan  of 
monetary  reform  should  have  been  agreed  upon,  to 
which  public  attention  could  be  directed.  The  reso- 
lutions, which  received  enthusiastic  adoption,  began 
as  follows: 

"This  convention  declares  that  it  has  become  abso- 
lutely necessary  that  a  consistent,  straightforward,  and 
deliberately  planned  monetary  system  shall  be  in- 
augurated, the  fundamental  basis  of  which  should  be,' 


A  COMMISSION  AUTHORIZED  289 

First,  that  the  present  gold  standard  should  be  main- 
tained. Second,  that  steps  should  be  taken  to  insure 
the  ultimate  retirement  of  all  classes  of  United  States 
notes  by  a  gradual  and  steady  process,  and  so  as  to 
avoid  injurious  contraction  of  the  currency,  or  dis- 
turbance of  the  business  interests  of  the  country,  and 
that  until  such  retirements  provision  should  be  made 
for  a  separation  of  the  revenue  and  note-issue  depart- 
ments of  the  treasury.  Third,  that  a  banking  system 
be  provided,  which  should  furnish  credit  facilities  to 
every  portion  of  the  country  and  a  safe  and  elastic 
circulation,  and  especially  with  a  view  of  securing 
such  a  distribution  of  the  loanable  capital  of  the  coun- 
try as  will  tend  to  equalize  the  rates  of  interest  in  all 
parts  thereof." 

Recognizing  the  absolute  necessity  of  committing 
the  formulation  of  such  a  plan  dealing  with  compli- 
cated currency  questions  to  a  body  of  men  trained  and 
experienced  in  these  matters,  a  commission  was  pro- 
posed. In  case  no  commission  should  be  authorized 
by  Congress  in  the  spring  of  1897,  the  executive  com- 
mittee of  the  convention  was  authorized  to  select  a 
commission  of  eleven  members,  "to  make  thorough 
investigation  of  the  monetary  affairs  and  needs  of  this 
country,  in  all  relations  and  aspects,  and  to  make 
appropriate  suggestions  as  to  any  evils  found  to  exist, 
and  the  remedies  therefor." 

When  the  labors  of  the  commission  had  been  com- 
pleted, it  should  make  "report  of  its  doings  and  sug- 
gestions in  such  manner  and  form  as  it  shall  deem 


290  MONEY  AND  PRICES 

best  adapted  to  present  the  same  to  this  convention 
and  its  members  for  action,  and,  if  legislation  is  deemed 
advisable,  shall  accompany  such  report  with  a  draft 
of  such  bill  or  bills  providing  for  such  legislation." 

Congress  did  not  authorize  the  appointment  of  a 
monetary  commission;  and  the  executive  committee 
of  the  Convention  selected  a  commission  of  twelve 
members,1  which  began  its  sittings  in  Washington, 
September  22,  1897. 

§  3.  The  reason  why  the  movement  for  currency 
reform  crystallized  in  the  appointment  of  a  monetary 
commission  was  solely  because  of  the  impelling  force 
of  public  opinion.  The  monetary  panic  of  1893  and 
the  disasters  of  1896  were  not  suffered  in  vain,  if,  out 
of  the  stress  and  strain  of  those  four  years  there  came 
a  deep-seated  conviction  that  indifference  to  great 
evils  was  no  longer  possible.  The  whole  purpose  of  a 
commission  was  that  it  might  present  definite  recom- 
mendations for  which  a  public  opinion  had  already 
created  a  demand.  Was  it  not  well  to  protest  against 
the  indiscriminate  criticism  of  Congress  on  the  ground 
that  it  had  taken  no  action  toward  currency  reform? 
Certainly  it  were  far  better  to  put  the  responsibility 
where  it  really  lay — with  the  absence  of  a  definite  con- 

1  George  F.  Edmunds,  Vermont,  chairman;  George  E.  Leighton,  Missouri, 
vice-chairman;  T.  G.  Bush,  Alabama;  W.  B.  Dean,  Minnesota;  Charles 
S.  Fairchild,  New  York;  Stuyvesant  Fish,  New  York;  J.  W.  Fries,  North 
Carolina;  Louis  A.  Garnett,  California;  J.  Laurence  Laughlin,  Illinois; 
C.  Stuart  Patterson,  Pennsylvania;  Robert  S.  Taylor,  Indiana;  and  L. 
Carroll  Root  and  H.  Parker  Willis,  secretaries. 


CONSISTENT  POLICY  291 

viction  as  to  specific  measures  on  the  part  of  the  gen- 
eral public.  Indeed,  some  persons  question  whether 
Congress  should  ever  legislate  except  in  answer  to  a 
clearly  expressed  mandate  from  the  people.  At  any 
rate,  it  was  puerile  to  waste  time  gossiping  as  to  who 
was  to  blame  for  the  existing  evils  in  our  currency 
system.  If  any  one  body  was  more  to  blame  than 
another,  it  was  the  general  public.  In  fact,  we  had 
about  us  as  good — or  bad — a  monetary  system  as  we 
deserved,  considering  the  intelligence  that  had  been 
given  to  it.  The  really  important  matter  was  the 
general  belief  that  conditions  then  contained  poten- 
tial disaster,  and  that  they  must  be  changed  for  the 
better.  If  our  currency  were  in  such  a  state  of  un- 
stable equilibrium  that  any  future  alarm,  such  as  the 
one  which  came  in  the  summer  of  1896,  might  produce 
a  paralysis  of  trade  and  industry,  then  it  was  bad 
business  policy  to  leave  our  currency  as  it  was  then. 

The  striking  thing  in  looking  back  over  forty  years 
is,  that  we  have  never  observed  any  steady,  continu- 
ous policy  in  regard  to  our  currency.  During  most  of 
that  time,  industry  was  handicapped  by  the  uncer- 
tainty of  a  depreciated,  or  a  doubtful,  standard  of 
prices  and  payments.  The  whole  importance,  there- 
fore, of  the  spontaneous  uprising  of  business  interests 
in  the  Convention  of  January  12,  1897,  resided  in  the 
creation  of  a  commission,  instructed  to  formulate  a 
consistent  monetary  policy,  which  might  be  laid  before 
the  public  with  a  view  to  its  guidance  and  instruction. 


2Q2  MONEY  AND  PRICES 

A  struggle  could  then  be  inaugurated  to  incorporate 
into  legislation,  as  rapidly  as  possible,  one  part  after 
another  of  this  general  plan.  In  short,  the  commis- 
sion had  it  in  its  power  to  set  up  a  pillar  of  cloud  by 
day  and  a  pillar  of  fire  by  night,  to  guide  the  followers 
of  sound  monetary  principles  through  all  the  marches 
and  campaigns  of  coming  years,  until  they  should 
reach  the  promised  land  where  freedom  from  monetary 
disturbances  should  be  ever  secured.  Granting  that 
all  the  conclusions  of  such  a  commission  could  not  at 
once  be  enacted  into  law;  yet  the  very  existence  of 
such  a  body  of  recolnmendations  would  in  itself  be  a 
fact  which  must  be  reckoned  with.  It  was  high  time 
that  some  monetary  Sheridans  should  appear  far  in 
front  of  the  hesitating  armies,  to  order  the  battle- 
standards  to  be  planted  well  forward,  and  courageously 
to  form  the  troops  upon  the  new  and  advanced  line. 

It  should  be  especially  noted  that  the  whole  move- 
ment, of  which  the  commission  was  the  outcome,  was 
essentially  democratic.  Members  of  chambers  of 
commerce  and  of  other  commercial  bodies,  represent- 
ing all  parts  of  the  country,  assembled  for  consulta- 
tion and  for  the  formulation  of  remedies  for  existing 
dangers  to  industry.  They  gathered  together  and 
appointed  their  representatives  to  act  for  them  in 
regard  to  currency  legislation  in  the  same  manner  as 
would  any  convention  of  merchants  seeking  redress, 
for  instance,  from  injurious  bankruptcy  laws.  The 
commission  was  merely  the  agent  of  the  great  business 


RIGHT  OF  PETITION  293 

constituency.  The  commission  and  the  body  from 
which  it  sprang  were  parts  of  but  one  movement.  If 
it  was  impertinent  for  the  commission  to  deliberate 
upon  currency  matters,  then  it  was  equally  imperti- 
nent for  the  business  interests  to  give  attention  to 
them. 

It  is  hardly  necessary  to  point  out  that  these  prac- 
tical men  of  our  land  were  acting  wholly  in  the  letter 
and  spirit  of  the  First  Amendment  to  the  Constitution, 
which  preserves  "the  right  of  the  people  peaceably  to 
assemble,  and  to  petition  the  government  for  a  redress 
of  grievances."  The  right  of  petition  has  been  effec- 
tive on  many  important  occasions.  In  England,  peti- 
tions brought  about  the  abolition  of  slavery,  the  eman- 
cipation of  the  Roman  Catholics,  and  the  repeal  of  the 
corn  laws.  Petitions  which  should  prayerfully  pre- 
sent the  conclusions  of  the  Monetary  Commission 
would  not  offer  the  opinions  of  a  self-constituted  body 
of  eleven  men,  but  those  of  the  duly  accredited  rep- 
resentatives of  the  commercial,  manufacturing,  bank- 
ing, and  agricultural  interests  in  different  parts  of  the 
United  States.  It  was  not  impossible  that  a  "  Mer- 
chants' Petition"  in  the  New  World  might  give  an- 
other date  to  the  records  of  progress  in  commercial 
history.1 

§  4.  The  merchants  of  our  country,  moreover,  in 
this  movement  which  culminated  in  the  creation  of  a 

1  The  work  of  the  commission  resulted  in  the  Act  of  March  14,  1900. 


294  MONEY  AND  PRICES 

commission,  took  a  position  that  indicated  the  appear- 
ance of  a  new  dignity  and  self-respect.  It  is  a  com- 
monplace of  democratic  government  to  insist  that  all 
forms  of  labor — each  and  all  the  industrial  occupations 
— should  be  regarded  as  equally  honorable,  and  that 
there  are  no  privileged  classes.  The  day,  when  no 
"tradesman"  can  be  presented  at  the  official  recep- 
tions of  our  government  will  never  dawn  for  an  Ameri- 
can. All  this  may  be  true,  and  more.  It  is  not  as 
generally  recognized  as  it  might  be  that  the  great  pre- 
ponderance of  the  brains  and  genius  of  our  people  is 
to  be  found  in  the  industrial  occupations  of  our  land. 
The  men  who  officer  the  great  industrial  machinery  of 
production  and  trade  are  constantly  putting  forth  an 
effort  of  mind,  a  creative  force,  an  originating  power, 
such  as  seldom  appear  in  other  professions.  In  fact, 
the  ablest  and  most  competent  men  are,  by  the  opera- 
tion of  our  social  development,  drawn  into  the  service 
of  business.  Had  the  scholars  of  our  time  the  driving 
energy  and  intellectual  quality  of  their  industrial 
brothers,  scholarship  would  advance  by  leaps  and 
bounds  far  faster  than  it  does  now.  Nothing  in  our 
American  life  is  more  marked  than  the  prodigious  dis- 
play of  virile  and  penetrating  intelligence  in  all  the 
departments  of  business  activity.  Only  too  often  are 
men  obliged  to  seek  the  so-called  learned  professions 
because  they  cannot  possibly  achieve  success  in  com- 
mercial life  in  face  of  the  intense  competition  of  strong 
men. 


SERVICE  OF  BANKER  295 

Yet  it  is  not  uncommon  to  hear  depreciative  remarks 
about  "mere  business  men."  Indeed,  by  some  strange 
survival  of  traditions,  there  has  been  impalpably  con- 
veyed to  the  public  judgment  a  bias,  more  or  less 
pronounced,  which  has  placed  the  business  man  in  a 
doubtful  rank  of  influence.  Strangest  of  all,  in  a 
democracy  like  ours,  the  man  of  affairs  has  felt  con- 
strained at  times  to  assume  an  apologetic  attitude 
toward  his  fellows.  In  view  of  his  powers  and  his 
daily  services  to  society  this  seems  quite  inexplicable. 
In  illustration  of  this  attitude  reference  may  be  briefly 
made  to  the  profession  of  banking.  I  am  fully  aware 
that  what  I  may  say  in  this  connection  may  be  mis- 
quoted and  misconstrued  and  regarded  as  showing  a 
weak  subserviency  to  wealth.  The  question,  however, 
is  "What  is  the  truth?"  not  "What  will  men  say?" 
And  it  is  high  time  that  some  one  should  have  the 
courage  to  tell  the  truth  about  bankers  and  bank- 
ing. 

The  widely  diffused  prejudice  against  bankers  comes 
from  persons  who  know  nothing  whatever  about  the 
business  of  banking,  or  are  ignorant  that  bankers  gain  a 
profit  only  from  their  discounts  by  buying  and  selling 
something  in  no  other  way  than  other  men  do  who  may 
have  invested  their  capital  in  dry  goods.  The  banker 
does  a  service  which  others  require.  No  one  is  obliged 
to  accept  a  loan.  The  service  is  rendered  by  voluntary 
action  on  both  sides.  In  no  sense  does  a  banker  earn 
his  profit  in  any  way  different  from  an  expressman  or 


296  MONEY  AND  PRICES 

a  cab-driver:  the  one  invests  his  capital  in  the  work 
of  supplying  society  with  the  machinery  of  exchanging 
and  transferring  goods,  the  other  invests  his  capital 
in  a  machine  for  the  transfer  of  persons  or  goods  from 
one  spot  to  another.  It  is  as  ignorant  and  childish  to 
say  that  all  bankers  are  bad  as  to  say  that  all  cabmen 
are  good.  Bankers  are  every  day  rendering  a  service 
to  society  without  which  industry  could  not  possibly 
go  on:  they  make  exchanges  of  goods  possible  in  a 
marvellously  skilful  manner,  and  increase  the  power 
of  production  and  the  efficiency  of  labor  in  ways  little 
understood. 

The  relation  of  the  banker  to  his  clients  is  generally 
a  closer  and  more  confidential  one  even  than  that  of 
the  clergyman  to  his  parishioners.  Every  man  in 
business,  sooner  or  later,  needs  assistance  at  critical 
moments.  Not  to  get  it  means  failure,  bankruptcy, 
and  poverty  for  his  family.  Perhaps  no  man  in  the 
community,  therefore,  is  the  recipient  of  more  sacred 
confidences,  more  inside  knowledge  of  his  client's 
struggles  and  hopes,  than  the  banker.  And  every  day 
we  are  intrusting  our  savings  and  investments  to  his 
honor  and  probity.  Think  for  a  moment  of  the  ser- 
vice to  society  performed  by  a  banker  who  vigilantly 
keeps  intact  for  our  daily  use  the  millions  upon  mil- 
lions of  dollars  of  deposits !  If  he  were  ever  distrusted 
for  one  hour,  imagine  the  chaos  that  would  supervene, 
and  picture  the  loss  to  innocent  people  who  are  obliged 
to  rely  on  skilled  advice  for  investment!    Is  it  not 


RIGHT  TO  DEMAND   JUSTICE  297 

then  a  piece  of  cowardly  and  unmanly  wrong  on  the 
part  of  some  of  our  people  to  describe  these  men  as 
"harpies"  and  "plunderers  of  the  poor"?  The  sense 
of  fair  play  should  require  retraction  of  such  untruth; 
for  untruth  it  is.  It  is  set  afloat  by  persons  who  have 
absolutely  no  knowledge  of  what  they  are  talking 
about;  it  is  tossed  about  by  those  whose  stock  in  trade 
is  to  excite  antagonism  between  the  rich  and  the  poor. 
So  far  has  it  gone,  that  the  banker  is  almost  excluded 
from  public  life.  The  demagogues  and  charlatans 
have  actually  led  bankers  to  assume  an  attitude  which 
admits  that  they  have  no  influence. 

If,  therefore,  this  rising  of  the  business  men  of  the 
whole  country  meant  anything,  it  meant  an  increasing 
sense  of  self-respect  and  dignity.  They  have  as  much 
right  to  unite  in  a  movement  for  the  protection  of 
trade  and  industry  from  ignorant  or  dishonorable 
assault  as  to  arrange  for  immunity  from  burglary  or 
sandbagging.  The  right-minded  man  of  affairs  has 
the  same  inalienable  privilege  of  demanding  justice 
and  freedom  for  his  work  as  the  religious  man  has  to 
demand  protection  and  freedom  in  the  exercise  of  his 
conscientious  scruples.  But  so  long  had  the  busi- 
ness interests  been  accustomed  to  bad  monetary  legis- 
lation that  the  apologetic  attitude  of  mind  was  not 
easily  thrown  off:  they  at  first  hesitated  to  demand 
all  that  was  rightfully  theirs.  Then,  however,  the 
spirit  began  to  change.  It  began  to  assume  with  busy 
men  the  character  of  a  holy  war  for  justice  and  for 


298  MONEY  AND  PRICES 

their  rights.  They  refused  any  longer  to  permit  mat- 
ters of  vital  interest  to  employers  and  employed — to 
industry  as  a  whole — to  be  tossed  about  the  political 
field  in  the  game  of  politics. 


APPENDIX 

LAW  OF  SANTO  DOMINGO,  1894 

The  National  Congress  in  the  Name  of  the  Republic 

At  the  initiative  of  the  Executive  Power,  upon  previous  declara- 
tion of  urgency,  and  the  three  constitutional  readings,  has 
passed  the  following: 

LAW  CONCERNING  DOMINICAN  COINS  AND  THEIR  COINAGE 

CHAPTER  I 

MONETARY   SYSTEM 

Article  i.  The  Dominican  Republic  shall  have  coins  of  gold, 
of  silver,  and  of  nickel. 

Article  2.  The  fineness  for  all  gold  and  silver  coins  shall  be 
nine  hundred  thousandths  of  pure  metal  for  one  hundred  thou- 
sandths of  alloy.  The  alloy  of  the  gold  coins  shall  be  of  copper, 
or  of  copper  and  silver,  the  silver  not  exceeding  one-tenth  part 
of  the  alloy.  The  alloy  of  the  silver  coins  shall  be  of  copper. 
The  nickel  coins  shall  be  of  copper  and  nickel,  being  composed 
of  three-fourths  parts  of  copper  and  one-fourth  part  of  nickel. 

Article  3.  The  legal  monetary  unit  in  the  Republic  shall  be 
the  "gold  dollar."  The  legal  weight  of  thi^  gold  dollar  shall  be 
twenty-five  and  eight-tenths  grains,  of  troy  weight,  for  the  gold 
coins,  of  which  twenty-three  and  twenty-two  hundredths  grains 
shall  be  of  pure  gold.  That  of  the  silver  coins  shall  be  four 
hundred  and  twenty-two  and  two-ninths  grains,  troy,  of  which 
three  hundred  and  eighty  grains  shall  be  pure  silver  in  each 
silver  dollar. 

Article  4.  The  "dollar,"  or  unit  of  account,  shall  be  divided 
into  one  hundred  parts,  called  "cents,"  and  the  weight  of  the 
"half-dollar,"  of  the  "quarter-dollar,"  and  of  the  "ten-cent" 

299 


300    -  APPENDIX 

pieces  shall  be  respectively  the  half,  the  quarter,  and  the  tenth 
part  of  the  weight  of  the  silver  "dollar." 
Article  5. 

I.  The  gold  coins  of  the  Republic  shall  be  the  following: 

a)  The  piece  of  gold  of  20  dollars,  which  shall  weigh  516  grains, 

troy  gold  weight. 

b)  The  piece  of  gold  of  10  dollars,  which  shall  weigh  258  grains, 

troy  gold  weight. 

c)  The  piece  of  gold  of  5  dollars,  which  shall  weigh  129  grains, 

troy  gold  weight. 

II.  The  silver  coins  of  the  Republic  shall  be  the  following: 

a)  The  silver  piece  of  one  dollar,  which  shall  weigh  422% 

grains,  troy  gold  weight. 

b)  The  silver  piece  of  fifty  cents,  which  shall  weigh  211%  grains, 

troy  gold  weight. 

c)  The  silver  piece  of  twenty-five  cents,  which  shall  weigh 

105%  grains,  troy  gold  weight. 

d)  The  silver  piece  of  ten  cents,  which  shall  weigh  42%  grains, 

troy  gold  weight. 

III.  The  nickel  coins  shall  be  the  following: 

a)  The  nickel  piece  of  2^  cents  shall  be  of  the  same  weight  and 

dimensions  as  those  now  in  circulation. 

b)  The  nickel  piece  of  1%  cents,  idem,  idem. 

Article  6.  The  gold  and  silver  coins  shall  be  circular  in 
form,  with  milled  edges.  The  size  or  diameter  of  the  different 
coins  shall  be  the  following: 

I.  Gold  coins. 

a)  The  gold  piece  of  20  dollars  shall  have  a  diameter  of  34.28937 

millimetres. 

b)  The  gold  piece  of  10  dollars  shall  have  a  diameter  of  26.66951 

millimetres. 

c)  The  gold  pieces  of  5  dollars  shall  have  a  diameter  of  21.58960 

millimetres. 

II.  Silver  coins. 

a)  The  silver  pieces  of  one  dollar  shall  have  a  diameter  of 
38.09931  millimetres. 


APPENDIX  301 

b)  The  silver  piece  of  fifty  cents  shall  have  a  diameter  of 

30.47944  millimetres. 

c)  The  silver  piece  of  twenty-five  cents  shall  have  a  diameter 

of  24.12956  millimetres. 

d)  The  silver  piece  of  ten  cents  shall  have  a  diameter  of  17.77967 

millimetres. 

Article  7.  The  design  for  the  nickel  coins,  as  well  as  the 
other  conditions  of  said  coins,  shall  be  fixed  by  decree,  which  the 
executive  power  shall  be  authorized  to  make. 

Article  S.  The  design  for  the  gold  and  silver  coins  shall  be 
as  follows: 

Upon  one  face,  that  is,  upon  the  obverse,  the  figure  of  Liberty, 
looking  toward  the  right,  the  head  bound  with  a  fillet,  upon  the 
surface  of  which  is  engraved  the  word  "Libertad,"  and  the 
figure  surrounded  by  the  letters  expressing  the  value  of  the 
piece,  and  the  date  of  its  coinage.  Upon  the  opposite  face, 
that  is,  upon  the  reverse,  the  coat  of  arms  of  the  Republic,  sur- 
rounded by  the  inscription,  "Republica  Dominicana,"  and, 
underneath,  the  numbers  or  figures  expressing  the  weight  and 
fineness  of  the  respective  coins. 

CHAPTER  II 

COINAGE  OF  COINS 

Article  9.  The  coinage  of  national  money,  in  accordance 
with  the  provisions  of  the  present  law,  during  the  continuance 
of  the  concession  of  the  "Banco  Nacional  de  Santo  Domingo," 
granted  to  the  "Credit  Mobilier,"  15  Place  Vendome,  Paris,  on 
the  26th  of  July,  1889,  or  during  the  existence  of  said  "Banco 
Nacional,"  shall  be  executed  in  preference  by  that  establish- 
ment, in  accordance  with  Article  15th  of  the  law  of  its  creation. 
In  case  the  "Banco  Nacional  de  Santo  Domingo"  should  not 
be  able  to  execute  the  coinage  in  conformity  with  this  law,  the 
Executive  will  sign  the  necessary  contracts  with  foreign  mints, 
the  operation  of  which  shall  be  under  the  inspection  of  the  Fiscal 
Agent  of  the  Dominican  Republic,  its  Minister  or  Consul,  who 
resides  in  the  place  where  the  coinage  is  struck. 


302  APPENDIX 

Article  10.  The  maximum  and  minimum  of  the  gold  and 
silver  coins,  or  the  deviations  permitted  in  their  weight,  shall 
never  exceed  the  following  limits  of  tolerance: 

I.  In  the  gold  pieces  of  20  dollars  and  10  dollars,  the  half  of 
a  grain.     In  the  piece  of  5  dollars,  one-quarter  of  a  grain. 

II.  In  the  silver  pieces  of  one  dollar,  of  fifty  cents,  of  twenty- 
five  cents,  and  of  ten  cents,  one  and  one-half  grains. 

CHAPTER  III 

OF  CIRCULATION 

Article  11.  The  pieces  of  five-francs,  one-franc,  and  a  half- 
franc,  ordered  to  be  coined  in  conformity  with  the  law  of  July 
16,  1890,  and  of  which  there  are  in  circulation  950,000  francs, 
are  subject  to  the  provisions  of  the  Decree  of  December  23, 
1891,  and,  therefore,  will  be  received  at  the  same  rate  as  the 
Mexican  dollar,  and  the  fractions  thereof;  that  is,  the  Domini- 
can piece  of  five-francs  shall  continue  to  circulate  at  the  rate 
of  one  Mexican  dollar;  that  of  one-franc  shall  circulate  as  a 
fifth  part  of  the  same  Mexican  coin;  and  the  piece  of  a  half- 
franc  in  the  same  proportion. 

§.  The  nickel  and  bronze  coins,  now  in  circulation,  shall  con- 
tinue to  do  so  at  -their  nominal  value  in  Mexican  coins,  which 
serves  as  a  basis  for  their  present  circulation. 

Article  12.  All  debts  and  obligations,  both  public  and  pri- 
vate, contracted  before  the  1st  of  June  next,  shall  be  paid  in  the 
same  money  in  which  they  have  been  contracted.  The  debts 
and  obligations  which  are  contracted  after  that  date  thence- 
forward shall  be  satisfied  conformably  to  agreement  between 
the  parties. 

§.  The  national  gold  coins  shall  be  a  legal  instrument  for  the 
payment  of  any  sums  whatever;  the  same  with  the  national 
silver  coin  and  its  fractions.  It  is  provided,  nevertheless,  that 
until  the  coins  created  by  the  present  law  are  coined  and  ready 
to  enter  into  circulation,  public  and  private  debts,  including 
fiscal  and  municipal  taxes,  may  be  satisfied  in  Mexican  silver 


APPENDIX  303 

money,  which  shall  be  received  for  what  it  is  worth  as  com- 
pared with  American  gold. 

§  §.  The  "Contaduria  General  de  Hacienda"  will  com- 
municate to  the  offices  under  its  jurisdiction,  weekly,  the  ex- 
change rates  that  exist  between  gold  and  Mexican  silver,  in 
order  to  fix  regularly  the  rate  at  which  said  Mexican  silver  shall 
be  accepted  in  the  payment  of  fiscal  duties;  and  this  same  rate 
shall  govern  the  payment  of  municipal  taxes. 

§  §  §.  As  soon  as  the  Executive  Power  shall  have  announced 
to  the  public  that  the  new  national  coinage  is  ready  to  be  put 
in  circulation,  the  Mexican  silver  dollar  shall  be  receivable  in 
payment  of  fiscal  duties  at  five  cents  less  than  the  value  for  bid 
quotations  in  the  markets  of  the  United  States  of  North  America. 

Article  13.  There  is  not  designated  in  the  present  law  the 
amount  of  gold  and  silver  coins,  or  minor  coins,  which  shall  be 
issued  in  accordance  with  the  provisions  contained  in  it,  and 
the  Executive  Power  shall  announce  by  means  of  a  decree  the 
amounts  that  are  to  be  coined  to  meet  the  requirements. 

Article  14.  In  view  of  the  lack  of  a  mint,  or  mints,  by  the 
Government  of  the  Republic,  it  is  authorized  to  create  a  Fiscal 
Agency  for  the  manufacture,  issuance,  and  redemption  of  its 
coin,  and  for  the  maintenance  at  par  in  gold  of  the  silver  and 
other  coins  of  the  national  coinage;  for  which  purpose  this 
Agency  shall  have  its  principal  office  in  the  capital  city  of 
Santo  Domingo,  and  branches  in  Puerto  Plata,  Sanchez,  and 
Santiago. 

Article  15.  It  is  understood  that  this  Agency  and  its 
branches  mentioned  shall  remain  under  the  charge  of  the 
"Banco  Nacional  de  Santo  Domingo,"  if  said  establishment,  in 
accordance  with  the  power  already  mentioned,  which  was 
granted  to  it  by  Article  15  of  the  Law  of  Concession,  claims  the 
right  to  coin  the  Dominican  money,  and  contracts  with  the 
Dominican  Government  for  all  that  concerns  that  operation. 

Article  16.  The  dollars  and  other  silver  coins  and  minor 
coins,  provided  that  they  have  the  weight  and  fineness  which 
are  indicated  in  Chapter  I  of  this  monetary  law,  shall  be  ex- 


304  APPENDIX 

changeable  at  their  face  value  for  Dominican  gold  coins  in  sums 
of  not  less  than  five  dollars  on  presentation  at  the  offices  of  the 
Fiscal  Agency,  or  of  the  "Banco  Nacional." 

§  If,  by  reason  of  any  extraordinary  or  unexpected  demand 
for  the  redemption  of  silver  coins  by  gold,  the  deposit  of  gold 
in  reserve  in  the  treasury  of  the  Fiscal  Agency,  or  of  the  Bank, 
or  of  any  of  their  branches,  should  become  exhausted,  said 
Agency  or  establishment,  or  branch,  may  tender  as  payment 
in  said  redemption  a  draft  on  a  financial  institution  in  New 
York,  meanwhile  approved  by  the  Government,  and  payable 
in  the  gold  coin  of  the  United  States  of  America,  and  of  equal 
value  to  the  sum  exchanged,  at  sixty  days  sight,  together  with 
interest  at  the  rate  of  six  per  centum  per  annum. 

Article  17.  The  "Banco  Nacional  de  Santo  Domingo,"  hav- 
ing, as  stated,  the  privilege  of  coining  the  national  money  which 
the  Government  of  the  Republic  desires  to  manufacture  for  the 
commercial  and  fiscal  necessities  of  the  Nation,  the  Executive 
Power,  immediately  after  the  promulgation  of  the  present  law, 
and  of  that  which  it  requires  and  directs,  shall  communicate  it 
to  the  principal  establishment  located  in  this  capital  city,  as 
also  the  amounts  of  the  respective  denominations  of  coins  which 
are  to  be  manufactured,  and  the  time  within  which  said  coins 
must  be  delivered  for  their  circulation  in  the  Republic.  Said 
bank  shall  then,  within  the  sixty  days  after  its  notification  by 
the  Fiscal  Agents  of  the  Government  in  Paris  of  the  necessity 
for  the  coinage,  state  in  writing  to  the  said  Executive,  or  to 
the  agent  selected  by  him  for  that  purpose,  its  intention  to 
comply  with  the  provisions  of  the  present  law,  and  with  the 
said  notification  which  is  made  to  it  to  coin  the  amount  of  na- 
tional money  which  is  ordered  to  be  manufactured,  in  which 
case,  the  said  bank  shall  be  constituted  the  Fiscal  Agency  of 
the  Dominican  Government  for  the  issue  and  redemption  of  the 
coins  as  herein  provided,  and  shall  have  all  the  powers,  priv- 
ileges, profits  and  obligations  which  may  be  derived  from  such 
capacity. 

Article  18.    If  the  said  "  Banco  Nacional  de  Santo  Domingo  " 


APPENDIX  305 

shall  not  announce  its  intention  to  comply  with  the  provisions 
of  this  law  and  with  the  notification  of  the  Fiscal  Agent  of  the 
Government  in  Paris,  within  the  specified  term  of  sixty  days, 
such  omission  shall  be  considered  as  a  waiver  of  the  right  to 
make  this  coinage;  and  if,  after  having  expressed  its  intention 
to  comply,  it  does  not  do  so  within  the  time  fixed  by  the  Execu- 
tive, it  shall  be  deemed  as  a  like  waiver. 

Article  19.  In  case  of  an  express  waiver  of  the  coinage,  or 
of  the  right  to  make  it,  as  well  as  of  the  functions  of  the  Fiscal 
Agency  to  redeem  and  distribute  it,  under  all  the  provisions  of 
the  present  law,  the  National  Executive  is  authorized  to  desig- 
nate the  bank  or  company  which  shall  perform  the  duties  of 
said  Agency;  and  the  regulations  which  shall  be  established  by 
the  Executive  with  the  Agency  referred  to  in  the  form  of  a 
contract,  shall  have  the  force  of  law. 

CHAPTER  IV 

IMPORTATION  OF  COINS 

Article  20.  No  coins,  of  gold,  nor  of  silver,  nor  of  the  minor 
coins,  shall  hereafter  be  issued  by  the  Government  of  the 
Dominican  Republic,  which  are  not  of  the  denominations, 
standard,  and  weights,  herein  established;  and  no  person  or 
company  whatever  shall  be  permitted  to  import  these  coins 
except  the  parties  to  the  contract  for  furnishing  these  coins, 
according  to  the  agreement  with  the  Executive  Power,  in  ac- 
cordance with  all  the  provisions  of  the  present  law. 

Article  21.  The  national  coins  shall  be  imported  by  the 
persons  or  companies  with  whom  the  contracts  may  be  entered 
into  for  their  coinage  and  introduction;  and  they  shall  come 
accompanied  at  each  importation  by  official  documents  signed 
by  the  persons  specified  in  Article  9  of  this  law,  declaring  that 
the  pieces  bear  their  seal,  and  conform  in  all  respects  with  the 
legislation  therefor. 


306  APPENDIX 

CHAPTER  V 

GENERAL  REGULATIONS 

Article  22.  Upon  publication  made  by  the  Executive  re- 
garding the  date  at  which  these  coins  ordered  to  be  coined  shall 
enter  into  circulation,  proper  arrangements,  wherever  neces- 
sary, shall  be  adopted  for  introducing  the  denominations  of  the 
new  system  of  money  in  all  the  accounts  of  the  Government 
offices  and  of  the  municipalities. 

Article  23.  All  coins  manufactured  by  other  persons  than 
those  who  may  be  parties  to  contracts  with  the  Government 
under  the  present  law,  shall  be  seized  wherever  found.  The 
value  of  the  metal  in  such  coins  shall  be  the  property  of  the 
informer,  and  all  those  who  may  be  adjudged  as  principals  or 
accomplices  in  such  acts  shall  suffer  the  penalties  which  the 
criminal  laws  provide  for  the  counterfeiters  of  money. 

Article  24.  All  laws  and  provisions  contrary  to  the  present 
law  shall  be  deemed  after  its  publication  as  null  and  of  no  value 
or  effect. 

Article  25.  The  Executive  Power  shall  decree  the  rules  and 
regulations  which  he  shall  judge  necessary  for  the  strict  ob- 
servance and  enforcement  of  the  present  law,  and  all  that 
concerns  it. 

Article  26.  The  present  law  shall  be  sent  to  the  Executive 
Power  for  its  publication  and  other  constitutional  purposes. 

Done  in  the  Hall  of  Sessions  of  the  Honorable  National  Con- 
gress, on  the  28th  day  of  the  month  of  April,  1894,  the  51st  year 
of  Independence  and  31st  of  the  Restoration. 

The  President :  Jorge  Curiel. 
Secretaries:  R.  Garcia  Martinez, 
C.  Noboa,  hijo. 

Let  it  be  executed,  communicated  by  the  proper  Secretary, 
and  published  in  all  the  territory  of  the  Republic  for  its  enforce- 
ment. 

Done  in  the  National  Palace  of  Santo  Domingo,  Capital  of 


APPENDIX  307 

the  Republic,  on  the  28th  day  of  the  month  of  April,  1S94, 
the  51st  year  of  Independence  and  31st  of  the  Restoration. 

The  President  of  the  Republic, 
U.  Heureaux. 

Countersigned  :  The  Minister  of  Finance  and  Commerce. 

Rivas. 


INDEX 


Africa,  gold  standard  in,  92. 

Agricultural  products,  rise  in  prices 
of,  36,  41 ;  fall  in  prices  of,  46. 

Agriculture,  deterioration  in,  122; 
causes  of  unrest  in,  152-175.  See 
also  Fanning. 

Alpaca,  fall  in  price  of,  50. 

Anaconda  mine,  49,  w. 

Animal  products,  prices  of,  36,  124. 

Arendt,  Dr.,  39,  n. 

Asia,  gold  standard  in,  92. 

Assets,  bank,  147-151,  277. 

Australia,  wool  production  of,  50. 

Austria-Hungary,  clearing-houses  in, 
72;  gold  standard  in,  91;  note  cir- 
culation of,  69. 

Banco  Nacional  de  Santo  Domingo, 
231. 

Bank,  deposits,  17,  18;  loans,  83-85, 
99-101;  loans  in  relation  to  re- 
serves, 146-149;  reserves  of  the 
world,  65. 

Bank-notes,  constitutionality  of,  272; 
convertibility  of,  275;  only  elastic 
currency,  273,  274;  and  the  money 
power,  268;  profit  not  due  to,  270; 
and  prices,  181;  fund  for  redeem- 
ing, 235-239;  safety  of,  278. 

Bank  of  England,  use  of  checks  by, 
269;  rate  at,  64;  no  special  reserve 
before  1844,  235. 

Bank  of  France,  use  of  checks  in,  72; 
rate  at,  64;  reserves  and  note  cir- 
culation of,  65. 

Bank  of  Germany,  rate  at,  64. 

Bankers,  service  of,  295-297. 

Banking,  inflation  in,  145-151;  mod- 
ern, 233,  234. 


Banks,  functions  of,  273;  the  rail- 
ways of  credit,  234;  profits  of,  240, 
241 ,  295 ;  free  disposal  of  bonds  by, 
244,  245;  amount  of  deposits  and 
loans,  1 88 1,  245;  separate  fund  of, 
for  redeeming  notes,  235-239; 
withdrawal  of  circulating  notes  by, 
237-239>  25°>  2555  contraction  of 
reserves  of,  255;  can  be  forced  to 
redeem  notes,  275;  panics  disas- 
trous to,  269,  270;  variation  in 
rates  of  discount  in  European,  42. 

Beef,  rise  in  price  of,  123,  124. 

Beet-sugar,  44,  45. 

Bills  of  Exchange,  72,  «.,  74. 

Bond,  George  William,  50,  «. 

Bonds,  interest  rate  and  value  of, 
243;  term  and  value  of,  242;  re- 
quirements as  to  3  per  cent.,  248- 
252. 

Boots,  price  of,  53,  141-143. 

Borrowing,  government,  by  issuing 
forms  of  money,  264,  265. 

Bourne,  39,  «.,  60,  n. 

Brazilian  coffee,  fall  in  price  of,  46. 

British  Indian  Currency  Committee, 
209,  227. 

Bryan,  W.  J.,  153. 

Burchard's  table  of  prices,  33. 

Bureau  of  Labor,  tables  of,  102,  104. 

Business  men,  high  quality  of,  294- 
298. 

Cacao  production,  201. 

Cairnes,  on  movement  of  prices  and 

gold  value,  57. 
Cane-sugar  production,  45. 
Cars,  price  of,  53. 
Cattle,  supply  of,  124,  125. 


309 


3io 


INDEX 


Cernuschi,  66,  n. 

Chambre  de  Compensation,  72. 

Checks,  increased  use  of,  71,  72,  180, 

269,    271;     and   prices,    181;    in 

United  States,  71,  180,  271. 
Chicago    convention   of    1896,  153, 

192. 
Circulating  notes,  237,  250. 
Civil  War,  American,  41. 
Clearing-houses,  71-73. 
Clothing,  price  of,  141. 
Coal,  fluctuations  in  price  of,  51; 

lowered  cost  of  production  of,  47, 

48^ 
Cochineal,  price  of,  50,  51. 
Coffee,  price  of,  45,  46. 
Coinage,  gold,  61,  n.,  62,  w. 
Combinations,    monopolistic,    127- 

129. 
Competitive  prices,  82. 
Congress,  blunders  of,  in  financial 

matters,  233, 257;  panic  forcedjby, 

254- 

Convention  of  1897,  287-293. 

Convertible  paper  money,  137,  138. 

Co-operative  societies,  133,  134. 

Copper,  price  of,  49. 

Corporations,  crusade  against,  193; 
and  large  production,  194,  195. 

Courcelle-Seneuil,  56,  n. 

Credit,  meaning  of,  20-22;  inflation 
of,  145-151;  injured  by  paper 
money,  264;  and  prices,  22,  23, 
83;  as  purchasing  power,  39,  40. 

Crimean  War,  41. 

Cuba,  mahogany  from,  52. 

Debtors,  legislative  favors  to,  187. 
Demand  for  goods,  what  constitutes, 
12,13;  and  prices,  99;  and  supply, 

43- 
Demand  notes,  263. 
Deposit  currency,  17,  18. 
Dingley  Act,  the,  109-111,  128. 
Dunbar,  C.  F.,  18. 
Duties,  protective,  108,  128. 
Dyes,  aniline,  50,  51. 


East,  farming  in,  160,  161. 
Economist  table  of  prices,  $3,  34,  36, 

41,  «.,  59,  101. 
Egypt,  gold  standard  in,  92. 
Elastic  currency,  273,  274. 
Ellstaetter,  207,  n. 
"Endless  Chain,"  the,  261. 
England.    See  Great  Britain. 
Europe,  addition  of  gold  to,  41,  w.; 

increased  paper  issues  and  prices 

in,  143,  144;    variations  in  bank 

discounts  in,  42. 
European  War  and  inflation,  137- 

151- 
Exchange,  evils  of  fluctuating,  207, 

209. 
Exchange,  media  of,  and  standard 

commodity,    3;     increase    of,    4; 

effect  of  quantity  of,  9;   demand 

for,  15-20;    many  kinds  of,  17; 

and  prices,  4,  5,  n,  178-182. 
Exchange  value  of  money,  1. 

Falkner  table  of  prices,  86. 

Fanaticism,  153-155. 

Farming,  special  conditions  sur- 
rounding, after  1873,  157  et  seq.; 
overdevelopment  in,  167-171; 
Western  and  Eastern,  160,  161. 

Farm-lands,  increase  in  value  of,  123; 
speculation  in,  167-171. 

Farms,  movement  from,  to  cities, 
165-167;  rise  in  prices  of  products 
of,  103,  120-126. 

Farrer,  T.  H.,  227. 

Federal  Reserve  Act,  150,  258. 

Federal  Reserve  banks,   139,   147, 

150. 

Fisher,  Irving,  138. 

Food  prices,  rise  in,  120-126,  141, 
142. 

Forney,  M.  N.,  53,  n. ' 

Forsell's  table  of  prices,  60. 

Fowler,  37,  «.,  45,  n.;  on  English 
trade,  74,  n. 

France,  clearing-houses  in,  72;  com- 
petition of,  with  England,  37;  note 
circulation  of,  69;    movement  of 


INDEX 


3ii 


prices    in,     33,    34;     wages    m, 

"5- 
Franco-German  War  of  1870,  42. 
Frewen,  39,  «.,  55,  ».,  58,  ».,  66,  n. 

German  bimetallists,  39,  n. 

Germany,  42;  clearing-houses  in,  73; 
trade  competition  of,  37;  gold 
demand  by,  32,  61 ;  gold  standard 
in,  91;  note  circulation  of,  69, 
70,  «.;  inconvertible  paper 
adopted  by,  138;  movement  of 
prices  in,  33-36,  86,  102;  rise  of 
wages  in,  76. 

Giffen,  Robert,  32,  39,  n.,  44,  n.,  58, 
60,  «.,  6i,n.,  63,  67,  68,  71. 

Gold,  annual  supply  and  existing 
stock  of,  94,  95;  coinage  of,  61,  n.; 
demand  for,  61,  90-94;  increase 
of,  in  circulation,  70;  international 
shipments  of,  73;  in  private  insti- 
tutions, 93,  94;  prices,  1850  to 
1915,  85-87;  annual  production 
of,  62,  66-68;  production,  1850  to 
1915,  87-89;  quantity  of,  and 
prices,  7,  14,  15,  80,  81,  97-102, 
135,182-185;  reserves  in  banks  of 
the  world,  65;  in  Federal  Reserve 
banks,  139;  scarcity  of,  32,  61-63, 
172;  transactions  without,  180; 
value  of,  and  prices,  31,  57,  61, 
178-180. 

"Gold-exchange  standard,"  198. 

Goschen,  Mr.,  32,  39,  «.,  44,  46,  54, 
55.  59>  »•>  61,  62,  65,  70. 

Government  notes,  cost  of  issuing, 
260-262;  "a  loan  without  inter- 
est," 262;  credit  injured  by,  264; 
mere  presence  a  menace,  265; 
whim  of  government  only  limit, 
266;  false  doctrines  concerning, 
267;  uniformity  of,  272;  failure 
to  redeem,  275;  value  of,  not  de- 
pendent on  wealth  of  country,  276; 
no  assets  for,  277;  and  political 
issues,  278. 

Great  Britain,  bank  reserves  and 
note  circulation  of,  65,  69;  use  of 


checks  in,  71,  72,  n.,  180,  269;  gold 
circulation  in,  62,  67;  gold  in  in- 
ternational trade,  74,  n.;  gold 
value  and  prices,  101 ;  movement 
of  prices  in,  33~37,  58,  59,  86; 
wages  in,  115;  war-time  prices  in, 

143. 
Greenbacks,  convertible,  259-261. 

Hadley,  Professor  Arthur  T.,  2,  «., 
s.3:  n' 

Haiti,  198,  199. 

Hamburg  table  of  prices,  33,  35,  36, 

57,  59- 
Hayes,  John  L.,  50,  n. 
Hayes,  President,  257. 
Helfferich,  J.,  39,  «. 
Heureaux,  Gen.  Ulisses,  203. 
Hogs,  price  of,  1 24. 
Horton,  S.  Dana,  67. 
Hume,  price  theory  of,  96. 
Huskisson,  39,  n. 

Importations,  duties  on,  108. 

Improvements,  44;  in  iron  industry, 
47, 48;  effect  of,  on  prices,  57, 107. 

India,  monetary  conditions  in,  208- 
210;  gold  standard  in,  91;  price 
readjustment  in,  215,  216;  limita- 
tion of  silver  in,  227;  rise  of  silver 
prices  in,  74,  n.,  217,  218. 

Inflation  and  European  War,  137- 

151- 

Interest,  changes  in  rate  of,  19,  243. 

International  trade,  24-26,  42,  73. 

Iron,  price  of,  lowered  by  improve- 
ments, 47,  48. 

Italy,  clearing-houses  in,  72,  73;  gold 
demand  by,  32,  61,  n.;  note  cir- 
culation of,  69;  specie  given  up 
by,  41;  wage  rise  in,  76;  war  of 
1859  m,  41. 

Jacob,  39,  n. 

Japan,  tea  production  in,  45. 

Jevons,  39,  n. 

Kinley,  Prof.,  1,  n. 

K.nux,  Comptroller,  240,  249. 


312 


INDEX 


Labor,  efficiency  of,  116-118;   agri- 
cultural, 122. 
Lambach,  Carl,  106. 
Laveleye,  38,  56, 58, ».,  61-63,  »•>  67- 
Lawful  money,  238,  239,  250,  255. 
Lead,  price  of,  49. 
Lecky,  Mr.,  280. 
Legislation  and  prices,  187-189. 
Leroy-Beaulieu,  42,  «.,  45, «.,  46,  n., 

47.  5°.  «•»  55>  »•»  72,  ».,  73- 

Liberty  bonds,  loans  to  pay  for,  151. 

Lime,  cost  of  production  of,  47,  48. 

Live  stock,  prices  of,  124. 

Living,  higher  standard  of,  134. 

Loans,  bank,  83-85,  99-101,  254- 
256;  on  demand,  objectionable, 
263;  profit  from  discount  on,  270; 
and  reserves,  146-149;  for  liberty 
bonds,  151;  for  war  munitions, 
149-151. 

Magee,  J.  D.,  87,  n. 
Mahogany,  price  of,  52. 
Manufactured  goods,  36. 
Materials,  duties  upon  raw,  109-114. 
McKay  welt-machine,  53,  54,  n. 
Meat,  rise  in  price  of,  123-125. 
Merchants'  Petition,  293. 
Metals,  speculation  in,  42. 
Mexican  silver  dollar,  the,  206,  211, 

230. 
Mill,  J.  S.,  2,  «.;    on  the  quantity 

theory,  38-40;    on  fall  of  prices, 

75,  76. 

Mineral  products,  prices  of,  36,  42. 

Mitchell,  W.  C,  86,  n. 

Mohair,  price  of,  50. 

Monetary  Commission,  the,  286, 
289-293. 

Money,  usage  of  the  term,  2;  ex- 
change value  of,  1;  functions  of, 
3;  demand  for,  15-20;  demand 
for  cheap,  socialistic,  190;  legisla- 
tive control  of,  177;  quantity 
theory  of,  27,  30,  38-40,  182-186, 
189;  quantity  of,  and  demand  for 
goods,  n-15;  as  a  standard  and 
as  medium  of  exchange,  178-182. 


Money-orders,  international,  74. 
"Money  power,"  the,  268. 
Monopolistic  combinations,  127-129. 
Mulhall,  38,  39,  «.,  60,  n.y  61,  «.,  72, 
«.,  74,  n. 

Nasse,  217. 

National  Bank  Act,  1864,  236;   Act 

of  1874,  238. 
National  City  Bank  of  New  York, 

269. 
National   Debt,   Act   to   Facilitate 

Refunding  of,  247-251. 
New  England  farms,  159. 
New  York,  banking  system  in,  235. 
Nicholson,  2. 

Nitrate  of  soda,  fall  in  price  of,  51. 
Note  circulation  of  the  world,  64,  65, 

69. 

Ocean  transportation  rates,  54,  55, 

142. 
O'Conor,  J.   E.,   74,   ».;    table  of 

prices  of,  217,  218. 
Optimism,  American,  284. 
Ore,  reduced  cost  of  production  of, 

47,  48. 
Overstone,  Lord,  137. 

Palgrave,  59,  71,  ». 

Panic  of  1873,  4i~43,  155-1575  of 
1857,  41;  of  1881,  254;  of  1893, 
in,  112,  130;   of  1907,  274. 

Paper  money,  190;  convertible,  137, 
138,  258,  259;  credit  injured  by, 
264;  depreciation  of,  in  Europe, 
143,  144;  fall  in  price  of,  51,  52; 
gain  in  security  of,  70,  71;  value 
of,  and  prices,  179,  180. 

Payne-Aldrich  Act,  108. 

Penzance,  Lord,  50,  n. 

Pepper,  price  of,  47. 

Petition,  right  of,  293. 

Pig  iron,  price  of,  48. 

Politics,  monetary  questions  in,  191- 
193;  and  government  paper,  278; 
indifference  toward,  280. 

Populists,  153,  158,  177. 


INDEX 


313 


Price,  explanation  of,  6-S,  178-180. 

Prices,  actual  process  of  determining, 
9-1 1 ;  demand  and  supply  in  mak- 
ing of,  19,  20;  summary  of  forces 
determining,  78-85;  and  credit, 
22,  23;  effect  of  media  of  exchange 
on,  4,  5;  fall  of,  due  to  changes  in 
cost  of  production  or  to  new  sup- 
plies, 44  et  seq.;  legislation  to 
raise,  187;  influence  of  gold  supply 
on,  8,  o,  14,  15,  32, 57-61,  95-102; 
and  international  movement  of 
specie,  24-26;  three  periods  in 
movement  of,  3;  and  rate  of  in- 
terest, 19;  affected  by  lowered 
standard,  184,  185;  variations  in, 
102-106,  186-188;  unsettled  is- 
sues in  theory  of,  27-29. 

Profits,  fall  in  rate  of,  75. 

Prussia,  war  of,  with  Austria,  41. 

Purchasing  power,  theory  of,  11-15, 
81,  82. 

Quantity  theory  of  money,  27,  30, 
38-40,  182-186,  189. 

Railroad  cars,  fall  in  price  of,  53. 
Raymond,  R.  W.,  50,  n. 
Refunding  bill  of  1881,  236,  239,  247- 

251;  Carlisle  section  of,  247,  253, 

256;    passed  by  Congress,   251- 

253;  veto  of,  257. 
Rents,  75. 

Reserves,  cost  to  maintain,  259-262. 
Retail  prices,  131-135,  141. 
Ricardian  theory,  8,  16,  24,  26,  96. 
Rich,  extravagance  of  the,  134,  135. 
Royal  Commission,  Report  of,  59, 

«.,  64,  n. 
Russia,  note  circulation  of,  69. 

Saltpetre,  price  of,  51. 

Santo  Domingo,  origin  of  plan  for 
monetary  system  of,  197;  soil  and 
climate  of,  198;  nature  of  inhabi- 
tants of,  199;  products  of,  199, 
201 ;  railways  and  telegraph-lines, 


202,  203;  public  finances  of,  203; 
former  monetary  system  of,  204- 
206;  compared  with  India,  208- 
210;  effects  of  gold  standard  in, 
211-214;  export  duties  of,  212; 
fluctuation  of  revenues  in,  213; 
readjustments  of  prices  in,  215; 
sudden  rise  of  silver  prices,  216, 
217;  merchants  of,  and  fall  of  sil- 
ver, 221;  wages  in,  219-221; 
laborers  in,  favored  gold,  220; 
requirements  of  new  legislation, 

222,  223;  monetary  unit  adopted, 

223,  224;  system  of  redemption, 
225-229;  limitation  of  silver  coin- 
age, 226-228;  management  of 
Mexican  dollar  in,  230;  legal  ten- 
der of,  230;  means  of  providing 
new  coinage  of,  231;  monetary 
system  of,  299. 

Sauerbeck's  table  of  English  prices, 

33.  34,  36,  86,  ».,  101. 
Scott,  W.  A.,  2,  n. 
Seager,  2,  n. 
Sherman  Act,  the,  173. 
Sherman,  Secretary,  report  of,  262,  n. 
Shoes,  fall  in  price  of,  53,  54;  rise  in 

price,  141-143- 
Silver,  in  bank  reserves,  65;    free 

coinage  of,  158,  172-176,  190-193; 

demonetization  of,  61,  77,  93;   in 

Santo  Domingo,  211-232. 
Socialism,  188-196. 
Soetbeer's  table  of  prices,  33,  34,  36, 

«.,  39,  ».,  62,  ».,  64,  «.,  76,  88,  n. 
South  America,  gold  standard  in,  92; 

nitrate  of  soda  deposits  in,   51; 

wool  production  of,  50. 
Specie,  amount  of,  in  circulation,  70, 

71;    international  movements  of, 

24-26;  table  of  reserves,  64,  65. 
Speculation,  129-131;  in  farm-lands, 

167-171. 
Standard  commodity,  and  media  of 

exchange,  3,  4;  supply  of,  5,  6. 
Staves,  white-oak,  price  of,  52. 
Steamships,  55,  161. 


314 


INDEX 


Suez  Canal,  55. 

Sugar,  production  of,  in  Santo  Do- 
mingo, 201;  reasons  for  fall  in 
price  of,  44,  45. 

Tariffs,  effect  of,  on  prices,  108-111, 
128, 129;  socialism  stimulated  by, 
194. 

Taxation,  effect  of,  on  prices,  108- 
112. 

Tea,  price  of,  45,  46. 

Telegraphs,  55. 

Tin,  price  of,  49,  50. 

Tobacco  cultivation  of  Santo  Do- 
mingo, 201. 

Trade,  international,  24-26,  42,  73. 

Transactions,  increased,  and  demand 
for  money,  15-20. 

Transportation  rates,  46,  47,  54,  55, 
142,  161. 

Treasury,  fiscal  and  monetary  func- 
tions of,  263-265. 

Turkey,  gold  standard  in,  92. 

United  States,  use  of  checks  in,  71, 
180,  271;  competition  of,  in  for- 
eign markets,  37;  gold  demand  of, 
61,  «.;  gold  standard  of,  91,  143, 
144;  monetary  legislation  of,  280- 


285;  demand  for  monetary  re- 
form in,  285-293;  note  circulation 
of,  69;  overtrading  and  extrava- 
gance, 1867  to  1873,42;  price  level 
in,  102;  wages  in,  76,  114,  115. 
United  States  bonds,  fluctuations  in 
value  of,  242-244. 

Vienna,  bank  exchanges  in,  72. 

Wages,  rise  of,  75,  76,  114-118;  and 

prices,  140. 
Walker,  Amasa,  2,  137. 
War  Finance  Corporation,  150. 
War  munitions,  149,  150. 
War-time  prices,  141-144. 
Wealth,  276. 
Weeks,  Joseph  D.,  48* 
Welby,  R.  E.,  227. 
West,  farm-lands  of,  160,  161. 
West  Indies,  sugar  of,  44,  45.' 
Western  farming,  overdevelopment; 

in,  167-171. 
Wheat,  freight  rates  for,  54;  prices1 

of,  45-47,  96,  97;   production  of, 

162-164. 
Wholesale  prices,  120-131. 
Wilson  Act,  the,  no,  112. 
Wool,  prices  of,  50;  tax  on,  109,  no. 


UNIVERSITY  OF  CALIFORNIA  AT  LOS  ANGELES 

THE  UNIVERSITY  LIBRARY 
This  book  is  DUE  on  the  last  date  stamped  below 


j^stW 


<&  V 


153 


APR  2  7  1955 
NOV  «     1958 

JAN  2  8   RECti 


' 


Form  L-9 
20ttl-l,*42(S519) 


UNIVERSITY  OF  CALIFORNIA 

AT 

LOS  ANGELES 

LIBRARY 


HG 
.229- 


L36m       Laughlin 
1920         Money  and 


prices 


Jwv  ia-> 


HG 
229 
L36m 
1920 


)CSOUM^?iSi^LiS}^«|^«iTu 


AA    000  568  087    1 


